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THE MODERN BANK 



APPLETONS' BUSINESS SERIES. 



The Work of Wall Street. 

By Sereno S. Pratt. Illustrated. i2mo. Cloth, 
$1.25 net ; postage, 12 cents additional. 

Funds and their Uses. 

By Frederick A. Cleveland, Ph. D., of the 
University of Pennsylvania. Illustrated. i2mo. 
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Trust Finance. 

By Dr. Edward S. Meade, of the Wharton School 
of Finance, University of Pennsylvania. i2mo. 
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American Railway Transportation. 

By Emory R. Johnson, of the Wharton School 
of Finance, University of Pennsylvania. i2mo. 
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The Modern Bank. 

By Amos K. Fiske. With an Introduction by 
James G. Cannon, Vice-President of the Fourth 
National Bank, JNew York. i2mo. Cloth, $1.50 
net ; postage, 12 cents additional. 



IN PREPARA TION. 
Railroad Finance. 

By Frederick A. Cleveland, Ph. D. 

Modern Accounting. 

By Henry Rand Hatfield, of the University of 
Chicago. 

PROPOSED VOLUMES. 

The Insvirance Company. 

The Trvist Company. 

Credit. 

Advertising. 

D. APPLETON AND COMPANY, NEW YORK. 




THE NEW YORK CLEAEING-HOUSE. 



THE MODERN BANK 



A DESCRIPTION OF ITS FUNCTIONS AND 

METHODS AND A BRIEF ACCOUNT OF 

THE DEVELOPMENT AND PRESENT 

SYSTEMS OF BANKING 



BY 



AMOS KIDDER FISKE, A.M. 

ASSOCIATE EDITOR OF THE JOURNAL OF COMMERCE 
AND COMMERCIAL BULLETIN 



\ 




NEW YORK 
D. APPLETON AND COMPANY 

1904 



+ 



if 



f 



LIBRARY of CONGRESS. 
Tw» Copies Received v - 

FEB 8 1904 

3 Copyright Entry 
Mr.!- IV Jr 
GLASS 0u ' xXc. No. 

J COPY B 



1~% 



Copyright, 1904, by 
D. APPLETON AND COMPANY 



PublisJied February, 190% 



• • » c • • 

« • • « 



• •- ••• , 



••• • * 



PKEFACE 



The main purpose of this volume is not to set forth or 
discuss theories and principles, or to give a history of 
banking or an account of different systems, but to describe 
in plain terms the various functions of the present-day 
bank in the United States and the methods by which its 
work is done. It is intended to give as clear an idea as 
possible of what an up-to-date bank does and how it is 
done. For this it is necessary to take what may be 
regarded as a typical bank and deal with its mechanism 
and methods, as all others will be only variations upon it, 
and it would be confusing to attempt an explanation of 
differences of detail. A large commercial institution with 
a full variety of banking operations in the financial center 
of the country has been taken as the model, and what it 
does and the manner of doing it fairly represents or sug- 
gests the business and methods of banks in general. 

While this has been the purpose of making a new book 
on an old subject, it has seemed best to lead up to it with 
some preliminary chapters on elementary principles and 
general methods, and to follow it with a rapid sketch of 
the development of banking and of existing systems., in 
order to make the volume fairly complete. Some chapters 
are also given on such subsidiary topics as trust companies, 
savings-banks, private banking-houses, foreign exchange, 
safe-deposit companies, etc. For the historical part free 
use has been made of the literature of the subject, with 



vi THE MODERN BANK 

which the writer has long been familiar, and no particular 
authority is entitled to special acknowledgment, though 
it perhaps ought to be said that in dealing with the actual 
history and with foreign systems Mr. Charles A. Conant's 
History of Modern Banks of Issue has been found par- 
ticularly useful. 

Information regarding the actual working of the 
American bank of to-day has been derived from the banks 
themselves by personal observation and inquiry, and here 
a number of acknowledgments must, in justice, be made 
to a very courteous and obliging set of men. The writer 
is especially indebted to Mr. James G. Cannon, vice-pres- 
ident of the Fourth National Bank, and to Mr. A. S. Fris- 
sell, president of the Fifth Avenue Bank, both of New 
York, who have afforded every opportunity for inquiry 
and investigation in those institutions. Mr. Walter L. 
Burckett, chief clerk of the former, and Mr. William C. 
Murphy, chief clerk of the latter, have been very kind 
and assiduous in answering questions and explaining the 
work of the different departments, whenever and wherever 
light was sought, and the latter examined critically the 
chapters relating to the practical work of a bank and made 
some valuable suggestions. The proofs have been carefully 
read by Mr. Frissell. Acknowledgment is also due to Mr. 
Henry Goldman, of Goldman, Sachs & Co., for points in 
relation to private banking-houses and international bank- 
ing ; to Mr. Beverley Chew, vice-president of the Metro- 
politan Trust Company, for information regarding the 
methods of trust companies; and to Colonel Charles E. 
Sprague, of the Union Dime Savings-Bank, for sugges- 
tions on the chapter relating to savings-banks. In short, 
all banking men applied to for information have shown 
unfailing courtesy in answering questions. It should also 
be mentioned that the Hon. William B. Bidgeley, Comp- 
troller of the Currency, obligingly furnished material re- 



PREFACE Vii 

lating to the organization and the reports of national 
banks; and the author is indebted to the American Insti- 
tute of Bank Clerks for permission to use one of its charts 
showing the distribution of functions and duties in a 
prominent bank. 

The writing has been done in odd hours and snatches 
of time in the midst of a rather exacting daily occupation, 
and doubtless lacks the symmetry and completeness that 
might have been attained by more continuous and leisurely 
work. But with its acknowledged defects it is submitted 
to the public with the hope that it will give a fairly clear 
and full idea of the complex operation and great utility in 
the business of the day of the modern bank. 

A. K. F. 

New York, December, 1903* 



J 



CONTENTS 



PAGE 

I. — Some Elementary Principles 1 

II. — General Principles and Methods in Banking . . 11 

III. — Credit Currency, or "Paper Money" ... 19 

IV. — Organization of a Bank 25 

V. — Premises and Equipment .34 

VI. — Directors and Officers 37 

VII. — The Departments of a Bank's Work .... 43 

VIII. — Deposits and the Receiving Teller .... 47 

IX. — The Note-Teller and his Receipts .... 60 

X. — Exchanges through the Clearing-House ... 63 

XI. — Collecting Out-of-Town Checks . . . . .75 

XII. — The Paying Teller and the Bank's Cash ... 85 

XIII. — How Paid Checks are Disposed of . . .93 

XIV. — Collection Department 101 

XV. — Drafts and Domestic Exchange . 104 

XVI. — Discounts and Commercial Paper .... 118 

XVII. — Credit Department a 129 

XVIII. — Loans on Collateral Security 137 

XIX. — Certificates of Deposit, Letters of Credit, and 

Bills of Exchange 147 

XX. — Miscellaneous Service, Correspondence, Protests . 153 

XXI. — The Circulation of National Banks . . . .159 

XXII.— The Banking Reserve ....... 163 

XXIII. — Bookkeeping of the Bank 169 

XXIV. — Examinations, Statements, and Reports . . . 186 

ix 



X CONTENTS 

PAGE 

XXV. — Clerical Force and Lines of Advancement . . 196 

XXVL— Banks that Fail 200 

XXVII.— Clearing-House and Other Associations . . . 204 

XXVIII. — State Banks and Trust Companies .... 213 

r XXIX. — Private Banking-Houses 223 

XXX. — Foreign Exchange and International Banking . 228 

XXXI.— Savings-Banks .244 

XXXIL— Safe-Deposit Vaults ....... 255 

XXXIII. — Development of Modern Banking .... 261 

XXXIV. — The British Banking System 279 

XXXV.— The German System 288 

XXXVI.— The French System . 293 

XXXVII. — Banks in Other European Countries . . . 297 

- XXXVIII.— The Old United States Banks 303 

XXXIX.— The Old State Banks 310 

XL. — The Canada Banking System 320 

XLL— The United States National System . . . 325 

XLII. — Tendencies of American Banking .... 334 

Index 341 



LIST OF ILLUSTRATIONS 



PAGE 

The New York Clearing-House Frontispiece 

Chart of a New York bank with large general business . facing 44 

Deposit slip 49 

Receiving teller's proof 55 

Face of ordinary form of bank check 58 

Settlement sheet 65 

Clearing-House credit-ticket .... ... 67 

Clearing-House balance-ticket 70 

Gold certificate, New York Clearing-House 71 

Clearing-House due-bill .73 

Back of collected check . . . . . . . . .76 

Paying teller's morning cash schedule 89 

Paying teller's proof facing 91 

Face and back of paid and canceled check . . . .99 

Sample of accepted draft . . 105 

Bank draft Ill 

Form of bill receivable . . . . . . . . 121 

Sample of single-name paper . . 123 

Report on offering for discount 124 

Credit clerk's report on application of a country bank for discount 135 

Form of collateral loan note 140 

Inside envelope for collateral securities 143 

Bank money-order used by an association of banks .... 151 

Form of account on page of individual ledger 177 

Note-teller's proof facing 176 

Charge and credit ticket 179 

xi 



xii LIST OF ILLUSTRATIONS 

PAGE 

General proof . . . facing 184 

Weekly statement of New York Clearing-House banks . facing 186 

Weekly statement of non-member banks .... facing 188 

Statement of Clearing-House bank 189 

New York Clearing-House loan certificate, 1873 .... 209 

Certificate of deposit 221 

Letter of credit for use of travelers 241 

Traveler's check 242 

Entrance to safe-deposit vault 257 

Interior of large safe-deposit vault ....... 259 



THE MODERN BANK 



SOME E L E ME NTAEY PRINCIPLES 

Barter, Money, and Credit 

The bank is the most important . instrumentality in 
the modern system of industry and trade. Without it 
this system could never have developed, and without it 
could not now be maintained. It makes possible the 
immense scale upon which labor is divided and applied 
to a multitude of processes upon which mechanical appli- 
ances for saving labor or increasing its effect can be used, 
upon which the work of transportation and distribution 
can be carried on, and upon which the interchange of 
commodities for the satisfaction of the wants of man can 
be effected. This scale of cooperative activity results in 
obtaining from the natural resources of the earth a 
volume of products far beyond what would be conceiv- 
able without it, and this abundance of production from 
human effort raises immeasurably the level of human 
well-being. It has been the chief motive power in the 
advance of material civilization in the last century, and 
it has been made possible by the device of banking, which 
is based upon trust and confidence among men and has 
consequently been a potent agency in stimulating and 
strengthening integrity in commercial dealing. Banking 

1 



2 THE MODERN BANK 

is the agency by means of which credit is made to effect 
the bulk of the operations of production and interchange. 
To make this clear it is necessary to trace briefly the 
natural course of commercial development. 

The clue to all the intricacies of modern finance is to 
be found in the elementary principle that trade, however 
complex and highly developed, is always in effect mere 
barter, the exchange of one product of human labor for 
another. By holding fast to this clue we shall be able to 
follow the development from the simple conditions of 
primitive life through the vast labyrinth of traffic and 
exchange, with their manifold agencies and methods, 
which has been built up with the increase of production 
in recent times, and we shall never lose our way. At the 
beginning of the process of economic growth each man gets 
from the resources of nature by his own efforts what is 
needed for his subsistence. In the course of time men learn 
to work together, to increase the store of what they can get 
to satisfy their wants or desires by uniting their efforts. 
Their wants and desires increase with the means of satisfy- 
ing them, and they soon come to a division of labor, one set 
of men devoting themselves to producing one kind or class 
of articles for their use or enjoyment, and the other set an- 
other kind. Then they exchange products on a basis of their 
relative values, value being at first determined by the 
amount of labor required to produce the different articles. 
One will give of his own for the products of another as 
much as has cost the amount of labor that he would have 
to bestow in order to obtain the other for himself. Both 
are saved from trouble and mutually benefited by the 
exchange. 

As occupations increase in number and variety and 
men can not easily turn from one to another, a new ele- 
ment enters in to modify the simple measure of value 
determined by the amount of individual labor necessary 



SOME ELEMENTARY PRINCIPLES 3 

to obtain one object or another of need or desire. With 
the growth of the primitive industrial community differ- 
ent articles are not produced in exact proportion to the 
various demands of its members, and there comes to be, 
within limits that constantly vary, a relative scarcity of 
one and a relative abundance of another. Exchangeable 
values are modified by the relation of supply to demand 
and gradually come to be determined by it, the original 
labor cost being lost sight of, though still the decisive 
factor. How much of one product will be given for 
another depends not simply on how much labor is required 
to produce one or the other, but upon how much of each 
is immediately to be had and how strong is the desire to 
have it. That which is scarce w T ill have a higher value 
measured in that which is plentiful, but the adjustment 
tends to correct itself by labor going from the occupation 
that is producing a surplus to that in which the produc- 
tion is deficient, so that the labor cost still has a control- 
ling effect in keeping a certain balance between supply and 
demand. 

But this individual exchange of one thing for another 
can not go on long. There must be some general means 
of exchange even by barter, some market-place at which 
the different articles can be assembled and from which 
they can be distributed, and the trader, or middleman 
between producers and consumers, becomes necessary. He 
must receive a share in the fruits of production for his 
service in furnishing a market for sellers and buyers, who 
are the real parties to the exchange of products. He 
does not merely enable them to sell and buy — that is, 
to exchange products among themselves — but himself 
becomes the buyer from those who have to sell and the 
seller to those who wish to buy, making his profit and 
accumulating a capital by giving to the seller a little less 
and taking from the buyer a little more than would be the 
2 



4 THE MODERN BANK 

values if they exchanged directly with each other. Their 
advantage, for which this difference pays, lies in being 
saved the time and trouble of finding a variety of 
customers for their different wares, and this enables them 
to produce more than they otherwise would do. 

But this system of direct barter of one commodity for 
another can not keep up long in an industrial community 
that is really progressing. It would be too cumbersome 
and inconvenient, and as the volume and variety of pro- 
duction increase there must be greater facility in effecting 
the exchanges by which its fruits are distributed or the 
community will cease to develop. The first step is to fix 
upon some one commodity, of value as universal and as 
stable as possible, which all sellers can receive for what- 
ever they have to offer in the market and which all buyers 
can give for whatever they wish to obtain. This constitutes 
a medium of exchange which all can use. Trading is 
greatly facilitated and industrial development continues 
to advance. This common article of exchange, whatever 
it may be in substance or quality, is what we call money. 

We need not for our present purpose go into an account 
of the development of money systems. One article after 
another was used in the early stages according to the con- 
ditions prevailing, until the precious metals were settled 
upon as most stable and uniform in value, most universally 
acceptable, and most convenient for this use. They were 
made into coins by governments so as to provide certain 
specific quantities of ascertained value in convenient form 
for constant use, and to give assurance that they were at 
all times and in all places what they purported to be in 
material and quality and therefore in value. The point 
to be impressed and to be kept in mind is this, that money 
is a commodity, carrying its value in itself like any other, 
and exchanged for other things upon precisely the same 
principle that applies in the exchange of other things for 



SOME ELEMENTARY PRINCIPLES 5 

each other. If the standard is of gold, for instance, it 
furnishes as a unit of exchange and of reckoning a cer- 
tain specific amount of that metal to be traded by whom- 
soever may possess it for an equivalent amount of any 
other article that he may desire. Now the man that goes 
to the market with the product of his labor gets its value 
in money, and the man that goes to the market to obtain 
the product of another's labor gives money for it. The 
seller of commodities buys one commodity now instead of 
many, but that one will buy any other when he wants it. 
The buyer of commodities sells his money for them, 
and that will buy anything that he may want because it 
is a commodity that all desire to obtain since they can 
always use it to exchange for others. This is because it 
carries a value in itself equal to that for which it is ex- 
changed and will command the equivalent wherever it 
goes. It is a medium of exchange because it will always 
exchange for anything else of equal value, and anything 
else of equal value will always exchange for it ; but plainly 
its purpose is to enable the possessors of commodities of 
one kind to secure in return for them commodities of 
other kinds which they may have occasion for, without 
having directly to swap them regardless of immediate 
needs. It enables them to dispose of what they have f when 
they are ready to do so and to obtain what they want when 
they are in need of it, in the meantime holding in pos- 
session the universal commodity, money. So it does not 
eliminate from trade the essential character of barter, 
the exchange of commodities for commodities according 
to their relative values, determined by the cost of their 
production and the relation of the amount to be had to 
the desire to have it, or of supply to demand. It only 
facilitates that process and vastly increases the scale upon 
which it can be carried on in any community and between 
one productive community and another. Thus far we 



6 THE MODERN BANK 

hold fast the idea that all trade is in its essence barter, 
and are ready to consider the next advance in increasing 
the ease and magnitude of its operations. This is in the 
use of credit. 

As the inconvenience of a direct exchange of one 
article for another leads to the use of money, the incon- 
venience of making payment with money every time a 
thing is bought or sold leads to trusting. The man who 
carries his products to market does not require to be paid 
in money every time, but allows the trader to owe him 
for them, thereby giving him credit and permitting an 
account to accumulate to be settled at some future time. 
The man who makes purchases at the market is not re- 
quired to pay each time for what he obtains, but receives 
credit, and his account is allowed to run, in order that 
he may make payment at his convenience. Mutual con- 
fidence becomes an important element in business. The 
same customers now become both sellers and buyers at 
the same trading-place, and what they owe is offset against 
what is due them, and there are only balances to be settled 
at intervals, once a month or once a quarter or a year, as 
the case may be. The trader keeps an account of these 
transactions, and each customer will do the same, if he is 
prudent, and between them there is a " book account." 
There is much less need of money in settling balances than 
in paying every time anything is bought or sold, and credit 
in this simple form facilitates business. Still, it is plain 
that what is exchanged is one commodity for another, and 
this can be effected by the use of credit even better than 
by the use of money, but the latter is necessary to furnish 
a standard of value and a means of reckoning values and 
to settle balances. 

If the payment of any amount due is deferred for 
some time, it is only fair that a little more should be paid 
to compensate the creditor for being deprived so long of 



SOME ELEMENTARY PRINCIPLES 7 

the money to which he is entitled, and of which he might 
make a profitable use in laying in a larger stock of mer- 
chandise. This gives rise to interest or compensation for 
credit. Sales may be made at certain prices with the 
understanding that payment will be made, or any balance 
due will be liquidated, within a certain length of time, and 
beyond that time a certain rate of interest will be paid 
on the debt. One may buy not only commodities from 
another, but his labor or service, which may be paid for 
in the products of other labor to the same value, or in 
money which will exchange for such products. This is 
still barter, in whichever form the payment is made. The 
laborer may trust his employer or give him credit and 
receive his pay at intervals. It is a matter of convenience 
and mutual agreement and does not change the essential 
character of the transaction. 

This is the use of credit in its simplest form, but it 
is a form in which it is still universally applied for econo- 
mizing the use of money. Another form of early origin 
and large development is its use in borrowing and lending. 
By that means accumulated resources may be so distributed 
and applied as to be made most useful in the varied proc- 
esses of production and distribution. Expressing our- 
selves for the moment as if the universal commodity 
money were the real object of acquisition, with the reserva- 
tion always in mind that it is so only as a means of reach- 
ing other commodities, we will say that one man has more 
than he has the occasion or the opportunity of using to 
advantage, while another has the occasion and the oppor- 
tunity but not sufficient money to take advantage of them. 
The man who has will lend to the man who has not, pro- 
vided the latter is to be trusted and can give reasonable 
assurance that he will repay with that fair compensation 
for the use of what belongs to another known as interest. 

The man who borrows may have sufficient substance not 



8 THE MODERN BANK 

immediately available for his present purpose, he may 
have capacity for a profitable use of more money than he 
has at command, and he may have a character that begets 
confidence. If he is one to whom the other is willing to 
lend, he is said to have credit, and because he has credit 
the other gives him credit, or trusts him. The simplest 
form of borrowing is on one's note of hand, or promise to 
pay the amount lent at or within a certain time with in- 
terest at a certain rate. This promise signed with the 
borrower's name may be deemed sufficient security by the 
lender that he will be paid according to the terms of the 
note, or he may desire to have the note indorsed by another 
whose credit he considers still stronger, and who thereby 
pledges himself to pay the debt in case the signer of the 
note fails to do so. Instead of such indorsement, or in 
addition to it, further security may be given in a pledge 
of actual property to an amount equaling or exceeding 
that of the loan, which is turned over to the creditor or 
upon which a lien is given enabling him to hold it or dis- 
pose of it to satisfy his debt in case the payment is not 
duly made. It is not necessary here to enlarge upon the 
subject of loans, the purpose being merely to illustrate this 
particular use of credit as a means of transferring the 
resources of one man to another for employment. 

We speak of this as an individual transaction, as a 
mere accommodation of one man by another, but in the 
growth of the industrial system this kind of accommoda- 
tion, or money-lending, becomes a separate and important 
function. Men devote themselves to it as they devote 
themselves to producing commodities and trafficking in 
them, because it facilitates those operations and enlarges 
their results. Men who have considerable money at com- 
mand make a business of lending it at interest, and being 
necessarily men of substance and of credit they are trusted 
with the money of others to lend. They may be trusted 



SOME ELEMENTARY PRINCIPLES 9 

with it for mere safe keeping, or, if they have large op- 
portunities for loaning profitably, they may pay interest 
upon it, thereby themselves becoming borrowers that they 
may lend upon a larger scale. Money-lenders were the 
first bankers, though often they were engaged in other 
business. The utility of credit, as it appears in this sim- 
ple and direct form of borrowing and lending, consists in 
the transfer of capital, or accumulated wealth, from one 
to another in a way to admit of its more effective applica- 
tion to the process of production, which is to be taken as 
including all the operations necessary for bringing the 
materials of nature to the consumer of the finished articles. 
The capital which might be idle or wasting in the hands 
of one man is put at the command of another who can 
employ it in producing and trading to the advantage of 
the community as well as of himself. In bringing to- 
gether this scattered capital from sources where it would 
be idle or useless and placing it at the command of those 
who can make use of it, the banker plays an important part 
in increasing production and is entitled to compensation 
commensurate with the value of his service. 

The individual banker, originally a mere money- 
lender or a tradesman who made it an incident of his 
business to take charge of the funds of others for safe 
keeping in return for the privilege of using or lending 
them for profit, was the forerunner of the modern bank, 
and we are in a position now to consider a little more at 
large the general principle of the bank's use of credit. For 
this it is necessary to refer in a preliminary way to the 
character and methods of a banking concern, which are 
to be dealt with in detail hereafter. To start with, a bank 
must have a 'certain amount of capital of its own with 
which to make loans and to establish the basis of its own 
credit, for it is mainly credit and not money with which 
it is to deal. But the volume of its business is not to be 



10 THE MODERN BANK 

limited by its own capital, for its chief function is to make 
the capital of others available to the best advantage. 
While its main purpose is to make loans, it is not from its 
own capital that they are to be chiefly made. It is to 
stand to the community as an embodiment of credit, mak- 
ing the scattered and unknown credit of some available 
for the benefit of others through its own concentrated 
and known responsibility, bringing together demand and 
supply in the use of credit by its own unifying force. So 
it begins at once not only to offer funds for loan but to 
receive funds on deposit. 






II 

GENERAL PRINCIPLES AND METHODS IN BANKING 

We will not at present undertake to trace the develop- 
ment of the modern bank from the original money-lender 
or the trader who made the care and use of the money of 
others an incident of his own business, but take a brief 
preliminary view of the chief functions of the bank as it 
is to-day and the methods by which those functions are 
exercised. It may still be an individual or a private firm, 
but in its larger significance it has come to be a corporation 
organized under specific regulations of law, and conducted 
under public supervision. It requires capital and definite 
responsibility, and these can be best secured on an adequate 
scale by incorporation. The need of capital is not merely 
or mainly to have funds for its business of lending, but 
to establish its credit, to enable it to command the confi- 
dence that will lead men to entrust it with their money, 
and to give assurance that it can meet every obligation 
that it assumes. 

The first business of a bank is to receive deposits, that 
it may have larger resources than its own capital for mak- 
ing loans, which is to be its chief function in facilitating 
the operations of production and trade. As the deposits, 
or rather their equivalent, will belong to its customers 
and be subject to their demand at any time, it must keep 
on hand a reserve of cash to meet such demand by paying 
back without hesitation such sums as may be called for. 
This is an important use of its own capital. Let us take 

11 



12 THE MODERN BANK 

a hasty glance at the purpose and manner of making loans 
and see how it leads to increasing deposits and making of 
them a mass of credits rather than of money. A man in 
business has to buy and incur large expense before he can 
sell and get his money back, and he has to give credit and 
wait for his payments. He wishes to obtain the money 
that is ultimately coming to him, or a part of it, for his pur- 
chases or the expenses of his business in advance of the 
time of collecting it. He goes to the bank and offers his 
own promissory note for the amount he desires, to be 
repaid at the end of a certain time with interest. If the 
bank has confidence in him it will discount his note, which 
means that it will pay over to him the amount at once, 
deducting the interest at the start instead of collecting it 
in addition to the principal at the time of payment. If it 
is doubtful of trusting him for the amount for the desired 
length of time, he may strengthen his own credit with that 
of another by having his note indorsed. In one case the 
bank takes his " single name paper " and in the other his 
" indorsed paper," but in either case he raises the needed 
money and the bank becomes his creditor. 

Or he may have the note of another man who is owing 
him money payable at a future time, and if that man has 
standing and credit in the community he can indorse the 
note over to the bank and have it discounted in the same 
way and get his money at once, less the interest. Then his 
debtor becomes the debtor of the bank, and the latter will 
look to him for the payment of the note when it matures 
instead of to its own borrower, though the borrower will 
be held by his indorsement for the payment of the note 
if the signer fails to meet it. In the course of mercantile 
business there is much of this kind of discounting. The 
merchant sells goods on time and the purchaser gives his 
note for the payment in thirty or sixty or ninety days, 
or in four or six months, or it may be in a year, but the 



GENERAL PRINCIPLES AND METHODS IN BANKING 13 

merchant is a buyer as well as a seller and he wants money 
now and is willing to make a deduction for interest to get 
it. The bank is his resource for meeting this want, and it 
discounts these notes and attends to their collection at 
maturity. 

Or a man who is making an investment or a purchase 
or has a payment to make may desire a loan from the bank, 
as distinguished from a discount, and he has property, 
or titles to property in the form of securities, which he is 
willing to pledge for the payment of the loan, with inter- 
est, at end of a certain period. If the securities are sat- 
isfactory to the bank it will take them in pledge and loan 
up to within a certain margin of their value. In this case 
the borrower's personal credit is of less consequence, as 
the bank has his property or an effective lien upon it, to 
insure the collection of the loan. In this case the man 
gives his personal note and puts up the securities as " col- 
lateral," but he gets the money for his immediate needs, 
and the bank gets it back with the interest agreed upon 
when the note matures, either by its payment or by selling 
the collateral security, though even in this case the inter- 
est is sometimes deducted when the loan is made. This 
is a " time loan " on collateral ; but the borrower may wish 
to borrow for an indefinite time, it may be a day or two, 
or it may be a week or two, and to pay at his convenience, 
while the bank may be willing to lend on those terms 
provided it is at liberty to demand payment at its own 
convenience in case it needs the money or can do better 
with it. This occasion of borrower and lender leads to 
" demand loans," or " call loans," on collateral security, 
and the rate of interest is determined from day to day by 
the demand and supply of funds for such accommodation, 
while the securities may be subject to change from day 
to day according as they fluctuate in value or the owner 
may have other use for them or as changes may be made 



14 THE MODERN BANK 

in the amount of the loan. This change or substitution of 
security applies as well to time loans. 

We are now in a position to understand how loans are 
used to create or increase deposits, converting these from 
money into credits. When the mercantile customer has 
his notes or his " bills receivable " — that is, the notes of his 
own debtors — discounted, or when any borrower gives his 
note and pledges security for a loan, he may not wish to 
use the money at once but to have it at command where 
he can draw upon it in making his payments. Then the 
bank may make him a depositor, if he is not one already, 
and credit him with the amount upon its books instead 
of paying it over to him, giving him the privilege of draw- 
ing upon it to suit his own convenience. In an active 
mercantile and financial community a large proportion 
of bank deposits are created in this way by borrowing, and 
consist of credits, not money. It is the credit of the bank 
turned over to the credit of the customer for his use, and 
he can turn it over to the credit of others in making his 
payments, so that money may play an inconspicuous part 
in the process, though not an unimportant one. It must 
lie at the bottom and be ready to make good all promises 
and pay all balances when settlements in cash are required. 

Though deposits consist so largely of credit, the bank is 
bound to pay in money whenever it is called for, and for 
that it keeps a " reserve/' which must be sufficient to meet 
all demands. A bank in active operation is engaged in 
a continuous process of lending, creating and receiving 
deposits, collecting maturing notes and bills and making 
payments, and it derives its profit from discount and in- 
terest and incidental charges for its service. It is always 
owing a large amount and a large amount is always due to 
it, and transactions upon both sides proceed mainly on 
credits which are continually offset against each other. 
So long as payments to the bank come in in due order, 



GENERAL PRINCIPLES AND METHODS IN BANKING 15 

payments by the bank are readily made and all goes well ; 
but if payments should fail to any serious extent, there 
might come a severe demand upon its resources to meet 
its own obligations. Then would come the test of its 
credit, which may be the support of the credit of thou- 
sands of others, and that test would depend upon its re- 
serve, its available resources, and the conservatism and 
skill with which it has been managed. 

Some inkling may be obtained from what has been 
said of the extent to which business is carried on by the 
use of credit through the instrumentality of the bank, but 
it can not be fully understood without considering the use 
of checks. This is a modern device of great potency for 
transferring credits through deposits in banks and econo- 
mizing the use of money in effecting the exchange of com- 
modities. A check is simply an order upon a bank from 
one of its depositors to pay a certain sum from his deposit 
to the order of himself or some one else, and when it is 
indorsed by the payee and presented the money will be 
paid over. If it is payable to the order of another person 
and that person is also a depositor in the bank, instead of 
having the check paid, the latter may deposit it as if it were 
money and it will be credited to his account and deducted 
from, or " charged to," the account of the drawer. In this 
case a payment is made between the two customers by a 
transfer of credit in the bank and no money passes. Pay- 
ments are constantly made in this way. 

But the person receiving the check may be a depositor 
in another bank, and in that case he deposits it in his own 
bank, where it is credited to his account and this second 
bank sends it to the first, upon which it is drawn, where 
it is " charged," or " debited," to the drawer's account. 
The two banks may have many customers who draw checks 
in favor of each other in making payments and receive 
checks from each other for payments, and each of whom 



16 THE MODERN BANK 

deposits the checks received in his own bank, whether 
drawn upon that or the other. The settlements between 
the depositors are made by transfers of credits in the banks 
and without the use of money, so long as they have the 
necessary funds on deposit, but the banks will have ac- 
counts to settle with each other. If one bank receives in a 
day more checks in aggregate amount drawn upon the 
other bank than the other receives of checks drawn upon 
it, there will be a balance due to it from the other bank. 
One day the balance may be in favor of one and another 
day in favor of the other, and they must settle these 
balances between themselves. They may be paid each day 
in money or by transfers of credit between the two banks 
until some stated settlement time when a single balance 
may be struck. 

In a populous community where there are many 
banks, this process becomes complicated. Each bank has 
many depositors drawing checks upon it which are de- 
posited in various other banks by those in whose favor 
they are drawn, and it receives upon deposit from its own 
customers checks drawn upon various other banks. The 
credits and debits are duly made in each case and the bal- 
ance struck every day, and each bank has a balance to set- 
tle, or to be settled, with all the others. To some it has 
payments to make and from others it has payments to 
receive. The sending about of clerks or messengers to 
clear up these settlements becomes an onerous matter, and 
this has led to the establishment in every large city of a 
central agency called a " clearing-house." This agency is 
established by an association of the banks, which pay the 
expense of conducting it in proportion to the average 
volume of their " clearings." 

While the working of the clearing-house seems com- 
plex, it is only an extension and multiplication of the 
simple elements of a transfer of credits and settlement of 



GENERAL PRINCIPLES AND METHODS IN BANKING 17 

balances, such as appears in the case of two or more 
depositors in the same bank. The clearing-house is a kind 
of bank of banks. Each bank makes out a list of the 
checks of each of the other banks that it has received and 
credited to its depositors during the day, and sends it the 
next morning to the clearing-house. Clerks and messen- 
gers of all the banks meet there with their lists, each hav- 
ing his place or desk in a common room, and by a com- 
parison of accounts a balance is struck for each, for or 
against it in every case, and these balances are adjusted 
against each other for all the banks by the clearing-house 
officers, and only a single balance upon the aggregate of all 
accounts remains to be settled by each bank with the clear- 
ing-house itself. If on the day's business a bank has re- 
ceived and credited to its depositors more in aggregate 
amount of the checks of all the other banks than all the 
other banks have received of its checks, a balance is due 
to it from the clearing-house funds; and if the balance 
of the aggregate is the other way, it owes that much to the 
clearing-house. By this process, so simple in principle 
and so complex in operation on account of the multiplicity 
of factors, all the balances between the banks are settled 
and reduced to a balance between each bank and the com- 
mon agency of all. The checks, being mere paper orders 
for payment, after having effected their purpose come 
back to the banks upon which they were drawn and are 
ultimately returned to those who drew them, as vouchers 
for the payments made in their behalf. 

It will be readily seen what a volume of business trans- 
actions may be effected by this process with comparatively 
little use of money, though banks are bound to pay money 
whenever it is demanded if it stands to the credit of the 
persons calling for it. The system is still further compli- 
cated by the relation of banks to each other not only in a 
single community, but in different and widely separated 



18 



THE MODERN BANK 



communities having dealings with each other. For in- 
stance, a person living in one city or town and keeping a 
deposit there may draw a check upon his bank to make 
a payment to a person in another city or town at a distance, 
and that person on receiving the check may deposit it in 
the bank where he lives ; or a man who is at a distance 
from the bank in which his account is kept may draw 
checks upon it to make payments wherever he happens to 
be, and these may be deposited by the recipients in any 
bank. This necessitates an arrangement between banks 
in different cities for adjusting such matters and sending 
checks to each other for collection, thus extending the 
process of exchange upon mere orders to pay over a wide 
area. 

This process of using credit through the agency of banks 
for effecting mercantile transactions, and for borrowing 
and paying on a large scale by a small use of actual money 
in settling balances, may extend over a wide area of the 
same country and into different countries. It contributes 
vastly to the volume of trade that can be continuously 
carried on and to the facility and economy of its opera- 
tions, and thereby it gives a scope to productive industry 
of all kinds which it could not otherwise attain. In the 
United States in time of industrial and commercial 
activity, about ninety-five per cent of all the exchanges 
which take place in the interval between the production 
and consumption of the commodities by which men live 
are accomplished upon credit and mainly through the 
agency of banks. 



Ill 

CREDIT CURRENCY, OR " PAPER MONEY " 

There is another matter pertaining to the use of credit, 
especially of bank credit, of which it is necessary to have 
a clear understanding as a preliminary to what is to fol- 
low about the actual operation of banks at the present day. 
We have spoken of money, the universal medium of ex- 
change, as having in itself the value for which it exchanges 
in other things, but it may have substitutes or representa- 
tives that will serve its purpose more widely than is done 
by bank checks, something that will pass from one to 
another in making payments without resort to the actual 
money until some one sees fit to demand it. Such substi- 
tutes form a " credit currency," and in order to serve their 
purpose safely must be issued by somebody, a government 
or corporation, or an individual, who is bound to redeem 
them in actual money whenever it is demanded, and does 
so redeem them. They are in effect promissory notes, 
which must be paid on demand or there will be a failure 
of credit and a depreciation of value. Confusion of mind 
has been produced by calling instruments of credit thus 
used " paper money." Paper w T ould have to be of a very 
precious quality to become money, but it is easily used 
to represent credit. 

Disputes about what money really is, like most dis- 
putes, come from a confusion of the meanings put upon 
words. Money may be used in its original sense of a 
medium of exchange, which is a commodity having its 
3 19 



20 THE MODERN BANK 

value in its own substance and thereby affording a measure 
for the value of other things ; or it may be applied to any- 
thing used in effecting exchanges ; or again, it may be used 
as an equivalent of value in any form, as when we say a 
man is worth so much money, meaning to include all his 
property. These are different senses of the same word, all 
proper enough if they are clearly distinguished in its use. 

Suppose that at an early stage of industrial develop- 
ment a man keeping a market-place, instead of paying 
those who bring him the products of their labor in money, 
for which they may have no immediate use or which they 
may not care to keep on hand, gives them slips of paper con- 
taining his promise to pay the money whenever they may 
want it on presentation of those slips. These may be 
written or printed and bear his signature or any device of 
his to identify them as genuine, or they may be on any 
cheap material. He may call them " notes/' or " bills/' 
or " tokens/' or what you will. They certainly are not 
money, but evidences of what he owes and promises to 
pay, and they are based upon his credit, or upon trust in 
him. He will not merely pay over the money for them 
when presented, but will accept them for goods bought of 
him instead of money ; and when he receives them he may 
destroy them or use them again in the same way, or replace 
them with new ones. Instead of making one each time to 
fit the amount of payment, he may have a lot of them 
made of different denominations, corresponding to the 
coins in use. 

If the man who issues tokens of this kind is widely 
known and trusted, if he has ample property and credit, 
and if he always accepts them in payments to himself or 
redeems them in money whenever it is demanded, these 
mere slips of printed or pictured paper bearing his name 
and device may be used by the people around in making 
payments among themselves, because they know that they 



CREDIT CURRENCY, OR "PAPER MONEY' ' 21 

will command the value they represent so long as the issuer 
is able and willing to redeem them on demand. They 
thereby become a kind of credit currency or " paper 
money/' and they will circulate as such so far and so long 
as the man who has put them out is known and trusted, 
though nobody will be bound to take them, and they will 
be refused whenever and wherever they are distrusted. 
Many a time a device of this kind has been resorted to in 
a community of greater or less size in times of scarcity of 
actual money. It involves in its simplicity the whole 
theory and practise of " paper money/' or credit currency. 
But suppose instead of the marketman or store- 
keeper, some person of known wealth and integrity, who 
makes a business of lending money in the manner described 
in the previous chapter, issues his notes to borrowers in- 
stead of money. They will be more convenient to use and 
just as good for their purpose so long as others will take 
them, depending upon the issuer to redeem them in money 
whenever they are presented to him and the coin is de- 
manded. He will naturally keep a supply of coin on hand 
to meet such demands, for the notes will depend upon his 
credit for their power to circulate as money, and he must 
keep that credit good by prompt payment whenever it is 
asked for. Go a step farther, and suppose it to be an 
established bank that issues the notes. It may have its 
notes finely engraved and signed by its officers, and its 
resources and credit may be so large and so widely known 
that they will be readily accepted and will circulate all 
over the country; but that will not make them money, 
though they may be called so. They will be mere promises 
of the bank and their value will be representative, not 
actual. Their power to purchase and to pay will depend 
upon the fact that whenever and by whomsoever they may 
be presented at the bank the coin they promise will be 
forthcoming. The moment that fails they will begin to 



22 THE MODERN BANK 

be refused, their circulation will stop and their value will 
vanish, because the value is not in the notes but in the, 
money they represent. In other words, " paper money " 
is not real money and will not continue current when the 
credit on which it was based is gone. 

Issuing circulating notes is but an incident in bank- 
ing, whereby banks make what appear like " cash loans " 
with their credit. Banks which issue such notes have 
them secured by available assets, or property in some form; 
that is, they keep on hand a certain amount of coin with 
which to redeem those presented, a certain amount of 
securities that can be readily converted into coin in case 
the demand for redemption should be unusual, and in any 
case ample property to make them all good. If there were 
no danger of failure to meet these obligations at all times 
from dishonesty, bad management or misfortune, and no 
fear of imitation or counterfeiting of the notes, there 
would be no occasion for a legal restriction or regulation 
of bank issues; but, in point of fact, they are generally 
put under restriction and regulation for the protection of 
those who accept the slips of paper and come to regard them 
as in effect the same thing as money. Banks are usually 
not permitted to issue circulating notes beyond a certain 
proportion of their actual capital, and they are required 
to hold a certain reserve of specie for their redemption, 
unless they are otherwise secured by a safe deposit of 
.negotiable securities. Besides this reserve for the imme- 
diate redemption of any notes that may be presented there 
must be sufficient security in some form to insure the pay- 
ment of all of them, if for any reason such payment should 
be demanded or if the bank should fail and have to wind 
up its business. Whatever may become of other creditors, 
holders of its circulating notes must be sure of their pay. 
It is not the purpose here to consider different systems 
of bank currency but merely to press the point that, while 






CREDIT CURRENCY, OR " PAPER MONEY " 23 

we are wont to call bank-notes " money/' they are really 
only substitutes for money, owing their power to effect 
exchanges, like checks, to the fact that money can be got 
for them at any time. They are not usually made a " legal 
tender " for debts, which means that no one is obliged to 
take them or go without payment, and when they fail of 
redemption they become worthless. 

But the government may issue its own notes or prom- 
ises to pay and have them circulate as substitutes for coin, 
and may even make them a legal tender for the payment 
of debts, as has been done in the United States ; but to 
maintain their value they must be redeemable on demand 
and a reserve in coin must be kept for their redemption. 
If they are not so redeemable, their purchasing power will 
depend upon faith in the government's final payment of 
what it has promised, and they will depreciate and fluc- 
tuate in value, having no solid basis to rest upon. No legal- 
tender law or forced circulation will keep them stable or 
on the level with coin. The United States notes are 
pertinent to our subject because they have been for forty 
years a part of the currency of the country, have been de- 
clared a legal tender for all debts, and are treated as " law- 
ful money," or the equivalent of coin, in banking reserves. 
Their volume has been unchanged at $346,681,016 for a 
quarter of a century, their redemption in gold coin on 
demand is pledged by the Government, and a fund of 
$150,000,000 in gold is held in the United States Treasury 
for the purpose. Nevertheless, they are not money, but 
notes that are reissued whenever paid, and our monetary 
system would be sounder without them, but for banking 
purposes they are now money. 

A form of " paper money " which is not credit cur- 
rency consists of gold and silver certificates representing 
dollar for dollar coin of those metals actually deposited 
in the treasury and always to be had in exchange for them 



24 THE MODERN BANK 

on demand. These maintain the exact value of the coin 
they represent and are in the strict sense substitutes for 
actual money, which is safely kept from loss and wear 
while they circulate in its place for safety and conve- 
nience. These various forms of paper in the United States 
circulate together on an equality and on the level of stand- 
ard money, only because that money can always be ob- 
tained with them. ]STo matter what is used for money in 
effecting the exchange of commodities or making payments 
for goods or services, setting value against value, the 
standard unit of measurement upon which the whole proc- 
ess turns is the commercial worth in the world's market 
of the 23.22 grains of fine gold in the American dollar. 



IV 



OKGANIZATION OF A BANK 

We are now sufficiently prepared to understand the 
organization and working of the present-day bank, and 
an account of the development of modern banking and 
of the different systems now in existence will be deferred 
until we have traversed that ground. For our purpose it 
will be best to adopt for description and illustration a 
typical institution belonging to the national system of the 
United States and located at its chief financial center. 
General principles and methods are the same for all, and 
they differ only in the detailed application, according to 
location, volume and character of business, and the ideas 
of the men who manage them. It might almost be said 
that no two banks are exactly alike in the details of their 
internal administration, and it would be confusing to at- 
tempt to deal with the variations. A large banking insti- 
tution exercising all the functions belonging to such an 
establishment will serve to cover the whole ground of ex- 
position, and it is only necessary to remember that differ- 
ences in detail are simply variations of method for secur- 
ing expedition, accuracy, and safety in operations that 
have the same general purpose. In describing the organi- 
zation of a bank we will confine ourselves to one belonging 
to the national system, for, while State laws differ, they 
follow in the main the lines of the national banking act 
so far as these are applicable. Some of them still have 
provisions of their own governing circulation, but as the 

25 



26 THE MODERN BANK 

federal tax upon the notes of State and private banks is 
prohibitive they have no circulating notes. 

There must be at least five persons to join as stock- 
holders in forming a banking association under the 
National Bank Act, and the first thing they have to do is to 
make an application to the Comptroller of the Currency for 
the privilege, stating therein the business and financial 
standing of each of them, whose character and responsi- 
bility must be vouched for by a United States Senator or 
Representative or some other " person of prominence." 
It must also state the name and location of the proposed 
bank and the amount of capital it is to have. If the 
Comptroller approves of the application he will furnish 
the necessary blanks and instructions for carrying out its 
purpose. Then the persons making the application must 
enter into " articles of association " prescribed by the law, 
in which' the title and location of the institution must be 
stated, the number of directors and the time of the meet- 
ing for their election — or the first directors may be named 
in the articles — amount of capital stock and other pro- 
visions conforming to the requirements of the statute. 
There can not be less than five directors, and each must be 
a citizen of the United States and owner of at least ten 
shares of stock, and three-fourths of the board must have 
resided at least a year in the State or territory and must 
continue to reside there while acting as directors. The 
shareholders have one vote at elections for each $100 share 
of stock. The articles of association must be signed by at 
least five persons and certified by the president or cashier. 
Then there must be a " certificate of association," signed 
and acknowledged by the same persons, in which, besides 
the title, location, and amount of capital, the names and 
residences of all the subscribing shareholders must be 
stated. The capital may be as low as $25,000 in a place 
of 3,000 inhabitants or less, $50,000 in a place of not more 




ORGANIZATION OF A BANK 27 

than 6,000, $100,000 in a place of not over 50,000, and 
must be at least $200,000 in larger places. One-half must 
be paid in cash on the organization of the bank and the 
rest in instalments of not less than ten per cent a month, 
though the whole may be made up in a shorter time. 

The directors must subscribe severally and collectively 
an oath that they will " diligently and honestly administer 
the affairs" of the association and not knowingly violate the 
law or willingly permit its violation, and they must as 
soon as practicable elect a president and cashier, and elect 
or appoint such other officers as may be required. The 
election of a vice-president is optional. They must also 
call in the subscriptions of capital, and as soon as 50 per 
cent is paid in there must be a certificate of the fact signed 
by the president, cashier, and a majority of the directors, 
with a declaration that the provisions of the law have been 
complied with. This must be attested on oath. All these 
documents and certificates, for which forms are furnished 
by the Comptroller, must be filed with that officer, and a 
deposit of registered Government bonds must be made 
with the Treasurer of the United States, equal to 5 &t least 
one-fourth of the capital of a bank of which the capital is 
$150,000 or less, and not less than $50,000 for those hav- 
ing a larger capital. Circulating notes may be taken out 
to the par value of the bonds, but not exceeding the amount 
of the capital stock. These will be supplied by the Comp- 
troller, who has the plates engraved and the notes printed 
at the expense v of the bank. They must be applied for on 
a regular form designating the number of sheets, which 
are mostly of four notes each, of the different denomina- 
tions required, but not more than one-third of these can be 
of the denomination of $5. Other denominations are $10, 
$20, $50, $100, $500, and $1,000, though few are issued 
higher than $100. The first order must be for one-fourth 
more in total amount than the par value of the bonds, the 



28 THE MODERN BANK 

excess being retained for future issues to replace worn- 
out or redeemed notes. It takes about forty days for 
the engraving and printing, and no application is acted 
upon until all the legal requirements have been complied 
with. 

The notes are of a common design for each denomina- 
tion and all bear on their face the signatures of the United 
States Treasurer and the Register of the Treasury certify- 
ing to the security by deposit of bonds, but those of each 
bank have the number of that association engraved upon 
them and a letter and numbers stamped in colors indicating 
the series and the extent of the issue. When the notes 
are received from the Comptroller the promise to pay to 
bearer on demand which appears on the face of each must 
be signed by the president and cashier before they are 
issued. This means that they must be redeemed in stand- 
ard money whenever presented for the purpose. The tak- 
ing out of notes is not obligatory, but the minimum 
deposit of bonds prescribed must be made in any case. 

When all the formalities have been observed and the 
papers duly filed, the Comptroller will, if all the proceed- 
ings meet his approval, issue a certificate authorizing the 
institution to begin business, assuming that the proper 
facilities have been provided, but he must afterward have 
a certificate of the full and final payment on the subscrip- 
tions of stock. No certificates of shares can be issued 
until full payment has been made. Provision is made for 
subsequent increase or reduction of capital, if authorized 
by owners of two-thirds of the stock and approved by the 
Comptroller, and of this a formal certificate must be filed. 
Provision is also made for the conversion into national 
associations of banks organized under State laws, when 
authorized by the owners of two-thirds of their capital 
stock. In that case there must be articles and certificates 
of association and other formalities similar to those ob- 



ORGANIZATION OF A BANK 29 

served in an original organization. Charters are limited 
to twenty years, but may be extended for a like period by 
act of Congress. Such extension has been twice made since 
the Bank Act was first adopted, namely, in 1882 and in 
1902. Each bank must make application to the Comptrol- 
ler for the privilege of renewal and get his approval to the 
necessary amendment of the articles of association, and 
must file the amended articles and a certificate that all 
required action has been duly taken, for which the consent 
of the owners of two-thirds of the stock is necessary. The 
Comptroller has an examination made, and if all the pro- 
ceedings meet his approval he will issue his certificate of 
extension. A new series of circulating notes must then be 
issued of a different design from the former ones. These 
will be furnished as the old ones are received for redemp- 
tion, and at the end of three years " lawful money " must 
be deposited to redeem any that may then remain out. 

The certificates of stocks which the shareholders re- 
ceive as evidence of their ownership are prepared by the 
bank according to its own design, and are signed by the 
president and cashier, testifying that the persons whose 
names appear thereon are entitled to so many shares of 
the capital. These certificates are bound together in a book 
from which they can be conveniently extracted and are 
numbered in consecutive order. They usually bear the 
statement that the shares are transferable only on the 
books of the bank on surrender of certificates, and in 
case of transfer a new certificate is issued to the new 
holder, and also to the former holder for any number of 
shares that he may retain. The leaves of the stock-book 
have a stub for each certificate, upon which is entered the 
number of the certificate, the number of shares, the date 
of issue and the name of the holder. Below this entry 
is a receipt to be signed by the holder, but there is a separate 
form of receipt to be used if he can not sign this in person. 



30 THE MODERN BANK 

There is another space upon which any transfer of all or 
any part of the shares may be noted, with the date and 
the name of the new holder. A stock register is also kept 
containing the names of shareholders, in the order of their 
subscriptions and the numbers of their certificates, their 
residences, dates of issue, and a note of any transfers, with 
their dates. The names of new shareholders are added to 
the list of old ones and the numbers of certificates con- 
tinue consecutively. Canceled certificates are usually 
attached to the stubs to which they belong in the book and 
from which they were first detached. 

Transfers must be made in person or by authenticated 
power of attorney. Most banks have a separate transfer 
book with a printed form of assignment to be filled out 
and signed. In this are entered the names of the persons 
from and to whom the transfer is made, the number of 
the old and new certificates, the number of shares and the 
pages of the stock-ledger on which the shareholders' ac- 
counts appear, for such a ledger is kept, recording each 
transaction in the stock. A clear record of the ownership 
of the bank and any change therein is thus systematically 
kept. 

After the organization of a bank, the first duty of the 
directors is to elect officers and adopt by-laws governing its 
management, framed in strict accordance with the pro- 
visions of the law. A form of by-laws is furnished by the 
Comptroller, but it is in the nature of a suggestion as to 
their essential requirements, and needs to be strictly fol- 
lowed only so far as it embodies those requirements, 
details being subject to the discretion of the board. The 
by-laws of different banks vary in many particulars and 
are determined largely by the volume and complexity of 
their business. They prescribe the time and manner of 
holding the meetings of stockholders and directors, desig- 
nate the officers to be chosen and define their duties, 



ORGANIZATION OF A BANK 31 

authorize the committees of directors and lay down gen- 
eral rules for the conduct of business in conformity with 
the requirements of law. A seal is adopted by the direc- 
tors, an impression of which is reproduced in the by-laws. 
A periodical examination of the affairs of the bank by a 
committee appointed for the purpose is provided for. 
Assuming that a properly equipped place of business has 
been secured, the bank may now be considered as an estab- 
lished and " going " institution. 

Its capital may range from $25,000 in a small town 
to millions in a large city. The highest limit yet reached 
in New York is $25,000,000. The law requires one-tenth 
of the net earnings to be set aside before dividends are 
declared, in order to accumulate a surplus, until a fund 
is raised equal to 20 per cent of the capital stock. Many 
banks have a surplus far exceeding that proportion and 
some have several times their capital stock. Sometimes 
in these days a bank starts with a surplus contributed by 
the shareholders in proportion to their quota of shares. 
This strengthens the position of the bank and gives it 
resource against early losses without trenching upon cap- 
ital. A part of the capital may be invested in a build- 
ing and the equipment for its business, and these are 
included in its assets. It can not invest in real estate 
for other uses or make loans upon real estate mortgages, 
but it may take such property in payment for debts in- 
curred in the course of its business and not otherwise col- 
lectable, and may take mortgages as security for such 
debts, foreclosing in case of failure to pay according to 
their tenor. Property thus acquired can not be held more 
than five years. 

Another portion of the capital is invested in the Gov- 
ernment bonds required to be deposited with the United 
States Treasurer. If circulating notes are taken out in 
excess of this amount, additional bonds must be deposited, 



32 THE MODERN BANK 

so that the entire security shall be equal in par value to 
the volume of circulation. The bank receives the interest 
on the bonds and the notes serve the same purpose in mak- 
ing loans and payments as would the capital thus invested, 
though if the bonds are bought at a premium a larger 
amount of capital will be tied up than of notes issued in its 
place. Other Government bonds, and securities of other 
kinds, may be held merely for the investment of funds for 
which at any time there may be no more profitable use. 
An amount of " lawful money/' which includes coin and 
coin certificates and legal-tender notes of the Government, 
but not bank-notes, must be kept in the bank's vaults, 
equal to 25 per cent of its deposits if it is in a " reserve 
city/' and 15 per cent elsewhere, though three-fifths 
of the reserves in the smaller places may be kept on 
deposit in reserve city banks, and these may keep one-half 
their reserves on deposit in a central reserve city, of which 
there are only three, New York being the principal one. 
The state of this reserve has to be regarded in receiving 
deposits and making loans, as it is a limitation upon the 
freedom with which the bank's resources are to be used 
from day to day. The drawing down of the reserve is a 
warning that loans must be curtailed, which is usually 
effected by advancing rates. The rising of the reserve 
much above the legal limit is a notice that available funds 
are lying idle and loans need to be pushed, even if some 
concession must be made in rates of interest. 

Banks organized under State laws and having no cir- 
culating notes are not subject to all the requirements and 
restrictions imposed upon national banks. Regulations 
differ in different States, but as a rule no such minimum 
limit is fixed for capital stock and no deposit of securities 
is required. A reserve to be held against deposit liabili- 
ties is usually prescribed, the common ratio being 15 
per cent. Their certificates of organization are filed with 



ORGANIZATION OF A BANK 33 

some State authority exercising supervision over them, 
analogous in different degrees in different States to that 
of the Comptroller of the Currency over national banks. 

Note. — For a fuller exposition of the law relating to national banks 
the reader is referred to the chapter on the subject near the end of this 
volume. 



PBEMISES AND EQUIPMENT 

A bank may hire the premises upon which its business 
is conducted, in which case the rent will be an item in its 
expenses, or it may have a building of its own especially 
constructed or adapted for its use, upon which the taxes 
will be an item of expense. The premises will be spacious 
and elaborate or otherwise according to its requirements 
for room or its resources for display. In the general 
arrangement of a large city bank there is ample space for 
customers open to the public and separated from the de- 
partments occupied by the working force by a partition, 
the upper part of which is usually open or transparent, 
frequently of wire lattice. This space is supplied with 
desks and stationery for the accommodation of those who 
have deposits to make or other business to transact. It 
may run along the front of the enclosed part or around two 
or more sides of it, so as to occupy the exterior area, or the 
enclosed part may run along two or more sides of the open 
space, leaving it in the interior area. It depends upon con- 
venience of arrangement and the character of the build- 
ing, but in any case the space occupied for the work of 
the bank is divided into compartments, usually by wire 
partitions with communicating gates and wickets for the 
different departments of the service. These divisions are 
arranged with reference to the relation between one de- 
partment and another and the need of ready communica- 
tion, and are equipped with desks, drawers, cases, etc., 
34 



PREMISES AND EQUIPMENT 35 

adapted specially to the use of their occupants. Those 
with which customers have occasion to deal directly have 
windows or wickets opening upon the public space, and 
over each of these is a designation of the department, or 
of the teller or clerk in charge of it. Some departments 
with which customers do not deal directly, as that of credit 
and that of bookkeeping, may be in a separate room or on 
a different floor. 

The principal officers may have accessible enclosures 
by themselves, or they may be in separate rooms or private 
offices. The degrees of seclusion or accessibility will de- 
pend upon the volume of business and the need of security 
from unnecessary intrusion, or upon the disposition of 
the officers to be readily seen or not. The cashier is usually 
easily accessible, as he is the officer with whom customers 
have most occasion to deal. Of the equipment of a bank 
it is necessary to speak only in general terms. Its most 
important requirement is ample vault and safe accommo- 
dation, proof against fire, burglary, or tampering of any 
kind. These differ greatly. There may be one large 
vault of the most approved pattern, accessible through 
heavy doors with complicated combination and time locks, 
the interior walls containing compartments of various 
sizes with their separate locks, for the deposit of cash, of 
securities, of documents and papers, of books, etc. ; or there 
may be more than one vault for different purposes, and 
special safes more conveniently located than the vaults for 
constant use. Usually the vault for books and files of 
documents is separate from that for cash and valuable 
securities. The latter is likely to be secluded in the base- 
ment and securely guarded. With all precautions for safe- 
keeping a vigilant watch will always be kept by faithful 
guardians, especially at night. A city bank has usually 
more than one watchman and requires a round to be made 
at intervals through the night, and has an electrical 
4 



36 THE MODERN BANK 

mechanism which registers his visit to the different 
stations in response to his pressing the proper button, 
marking the hour of each visit. It usually requires more 
than one person to open a combination lock, each being 
entrusted with a different part of the combination. The 
time-lock is an additional safeguard, preventing the opening 
of a vault before the hour for which it is set. The combina- 
tion numbers are kept in sealed envelopes, to be resorted 
to only in case of the failure of the persons entrusted with 
them to appear. When the day's business is done, there 
is a general storing away and locking up of the cash, securi- 
ties, and other valuables of the bank, including the books 
of account. 

It is hardly necessary to speak more in detail of the 
variety of desks with which the working departments are 
provided, adapted to their several uses, or the cabinets, 
drawers, pigeon-holes, file-cases, and other appliances, or 
of the books and stationery and the many forms and blanks 
necessary to facilitate work. The character and use of 
these will sufficiently appear as we go along, as will that 
of certain mechanical devices for saving labor which have 
been introduced in many banks. That the telegraph, the 
telephone, the typewriter, and the letter-press are in com- 
mon use as in other business establishments need not be 
said. 



VI 

DIRECTORS AND OFFICERS 

If the first directors of a national bank are not desig- 
nated in the Certificate of Association, they must be 
elected at a meeting of shareholders before the organiza- 
tion is completed, and thereafter their successors must be 
thus chosen at each annual meeting, the time of which is 
prescribed in the by-laws. Shareholders have one vote for 
each share of stock, and it is the majority of stock and not 
of holders that prevails. Voting may be done by proxy, 
but no director or officer can legally act as proxy for 
others. The directors are usually among the largest and 
most influential of the stockholders and each must own 
at least ten shares, and they are presumably chosen for 
their business capacity, sound judgment, and a character 
and standing that will command confidence, The time of 
the stockholders' meeting and manner of conducting the 
election of directors are prescribed in the by-laws, and the 
cashier is required to give thirty days' notice by publi- 
cation in a newspaper. At the first meeting a president 
and secretary are named, but subsequently the president 
of the bank presides and the cashier acts as secretary. 
Careful minutes of the proceedings are kept in a " minute- 
book." The number of directors can not be less than five, 
but beyond that it may be prescribed in the articles of as- 
sociation, in which a minimum and maximum may be 
fixed between which it may be changed by action of the 
shareholders or with their approval. 



38 THE MODERN BANK 

At their first regular meeting the directors choose from 
their own number a president of the bank, who is also presi- 
dent of the board, and a cashier who acts as the secretary 
of their meetings and recorder of their action. It is their 
business to shape the policy of the institution and direct 
its administration. The frequency of their meetings will 
depend upon the volume and character of the business 
under their charge and will be prescribed in the by-laws. 
They may depute their functions to a certain extent to an 
executive committee or a finance committee or to officers, 
but they can not avoid the final responsibility for their 
proper execution and for a careful supervision of the man- 
agement. The use of the funds belonging to the bank and 
to its customers is under their control. In a small country 
bank there may not be a directors' meeting more than once 
a month, to which the president makes his reports and 
from which he receives confirmation of his action and in- 
struction for his future guidance. In a city bank there 
may be a weekly meeting and an executive committee to 
exercise continuous supervision, but with some large banks 
there is a meeting more than once a week, and frequently 
more than one committee is appointed. 

The directors not only choose the officers of the bank 
but appoint all its employees, either directly or by ap- 
proval of those selected by the officers, and see to their 
being held under proper bonds proportioned to the im- 
portance of their duties and the extent of responsibility 
entrusted to them. They may, if they choose, decide who 
shall be among the depositors and customers of the bank, 
though that is commonly left to the officers, and they 
must pass upon loans and investments involving the 
use of its funds. In a large bank the negotiations and 
bargains, the agreements and actual discounting and loan- 
ing in the current day-to-day business, are ordinarily left 
to the discretion of the president or the vice-president 



DIRECTORS AND OFFICERS 39 

acting for him, to whom the applications are made, but 
what they do must be reported to the directors at their 
meetings and receive confirmation and approval. That 
is generally given as a matter of course, as the methods 
are of their own devising and have their authority, and 
the officers are careful to do nothing that is not likely to 
be approved. For the expedition of business in a busy 
institution the exercise of discretion by officers in the 
first instance is necessary, and it is to be remembered 
that borrowers who do not give ample security are usually 
depositors of the bank and known to its officers, or men in 
active business with money coming in from it, and that 
means are taken to keep constantly informed of their 
financial standing and condition. It is only in exceptional 
cases that applications for loans will be referred to the 
board of directors before being acted upon, or will be 
made directly to it. The general division and distribu- 
tion of labor within the bank is made by the directors and 
the methods pursued are prescribed by them, though often 
on the advice of officers. They act in a relation of author- 
ity over the management and in a fiduciary relation to 
both depositors and shareholders, while the business is 
of such a nature and so regulated by law that they are 
under a distinct responsibility to some public authority. 
The duties of the president and vice-president of a 
bank are pretty clearly implied in the description of the 
functions of directors. The president presides at their 
meetings, reports to them upon the bank's doings or has 
the cashier do so, and receives directions from them. He 
represents their authority and gives it effect, exercising 
supervision in their behalf. He is in direct contact with 
what is going on, and in the bank he is the final arbiter 
for the decision of all matters that need to be carried up 
to him. He may go about scrutinizing and inquiring to 
such extent as he sees fit, to keep himself in touch with 



40 



THE MODERN BANK 



details as well as familiar with the general state of affairs, 
and to him are brought such questions as subordinates, 
or the cashier, who is their immediate head, may be unable 
to settle or are in doubt about. It is to him that those 
come who desire to borrow from the bank or to use its 
resources or facilities, and he conducts its general deal- 
ings subject to the instructions or the approval of the di- 
rectors. But where the business is heavy the bulk of these 
duties may be put upon a vice-president, and only matters 
of special importance referred to the president. 

Most of the daily routine of the president's office will be 
discharged by this deputy, while the superior officer re- 
serves himself for consultation regarding larger transac- 
tions and settles matters that only he can finally pass upon. 
There are many cases in which the president's signature is 
necessary to documents and papers, unless on account of 
absence or disability the vice-president is authorized to act 
for him in such capacity. He must, for instance, sign the 
papers, usually in conjunction with the cashier, involved in 
organizing the bank, the certificates of stock, the circulating 
notes, and most official reports. There are many papers, 
such as contracts, drafts, etc., not requiring the signature 
of both president and cashier, that may be signed by either 
alone. To the public and in the eye of the law the presi- 
dent stands as the head of the bank and the representative 
of the authority and responsibility of the board of di- 
rectors. The election of a vice-president is not obligatory, 
and in some banks the office is dispensed with or is rather 
honorary than otherwise. In such cases he is merely one 
of the directors who acts for the president in his absence 
or in case of his disability, the practical work falling to 
the cashier, who in a small country bank often " runs the 
business." But in a large city bank an " active " vice- 
president is one of the busiest men in the place. He re- 
ceives callers, listens to applications, answers questions 



DIRECTORS AND OFFICERS 41 

and decides many matters of ordinary moment, relieving 
the president of the burden of routine duties. In a few 
banks there is more than one vice-president. 

The cashier of a bank is its chief executive officer and 
directs and supervises its internal work. He is necessarily 
familiar with all the details of the service and the methods 
of business, and is the commanding officer over the force 
of tellers, clerks, and other employees. He acts as secre- 
tary at the directors' meetings, verifies reports, certificates 
and statements, and signs various documents with the 
president, including stock certificates and the circulating 
notes. He is responsible for the funds, securities, and all 
the valuables of the institution, signs its own checks, 
drafts and vouchers, makes its indorsements, attends to 
the buying and selling of exchange, receipts for securities 
deposited and is responsible for their safe custody, and 
may rediscount paper or pledge securities for borrowing 
money, but with the knowledge and consent of the di- 
rectors. Usually, however, the president or vice-president 
who conducts a negotiation involving loan or payment will 
sign the checks in such transactions, and most of the in- 
dorsing is done by assistants of the cashier. New depos- 
itors are referred to him, and he assures himself that 
their custom is desirable before admitting them to the 
books. It is necessary for him to be at all times con- 
versant with the bank's condition and to be able to 
inform the president or vice-president how it stands in 
all departments of its business. He has charge of its 
correspondence and accounts, though detailed duties in 
connection with these may be deputed to others, who 
get his approval and signature when necessary. A state- 
ment is made up for him every day by the general book- 
keeper showing how all the important items of busi- 
ness stand, as to deposits, loans, receipts and expenses, 
cash 01* hand, etc., so that he may see at a glance the 



42 THE MODERN BANK 

relation of assets and liabilities and the state of the cash 
reserve. His intimate knowledge is an indispensable 
guide in each day's operations. 

It is obvious that the cashier in a large bank is a busy 
man and must have a clear head and decisive ways, and 
in the increasing extent and complexity of banking opera- 
tions it has been found necessary in the larger institutions 
to give him one or more assistants. In some there are 
several of these, each devoting himself to the immediate 
oversight of separate departments of the work under the 
cashier's direction. 

Sometimes a bank keeps a legal adviser, who is paid a 
salary to look out for the legality of its proceedings, at- 
tend to the form of contracts and the validity of docu- 
ments and to advise upon many points that are constantly 
liable to come up ; but, after all, his duties are those of a 
lawyer and he can hardly be regarded as a bank officer. In 
every large bank there is an auditor, who keeps a close 
supervision of accounts and of the vouchers and records 
of receipts and expenditures. 



VII 



Various departments in the work of a bank have been 
incidentally referred to, and it may be well before going 
farther to get a general idea of what they are and what 
their relation to each other is. Taking them in what seems 
to be their logical order, that of the receiving teller comes 
first, for, while the main business of a bank is loaning 
and investing funds in order to derive a revenue from 
them, as well as to make them in the highest degree useful 
to the community, the greater part of what it employs 
comes from depositors. This teller, as his title implies, 
receives the deposits that come in directly over the counter, 
and he occupies one of the most conspicuous of the divisions 
of the banking-space with which the public has communi- 
cation. He has charge of the funds received until he has 
fully accounted for them. Next in order to him comes the 
note-teller, who, however, is closely associated with the 
collection and corresponding departments and the depart- 
ments of discounts and loans. Some of the items which 
come to the receiving teller, such as drafts, checks upon 
out-of-town banks and such as are not exchanged through 
the clearing-house, and coupons, have to be collected. 
These, if they are to be collected in the city, go directly 
to the note-teller, and after the collections are made the 
proceeds are accounted for by him. He also, as his title 
implies, receives all payments upon notes whether dis- 
counted by the bank or given as evidence of loans in any 
form, or merely presented by a customer for collection. 

43 



44 THE MODERN BANK 

While other departments have charge of discounts and 
loans and out-of-town collections, the final payments pass 
through the note-teller's office and he is responsible for 
rendering an accurate account of them. Collateral loan 
payments, however, are made to the loan clerk and the 
proceeds turned over to the note-teller. Thus next to that 
of the receiving teller his department is the important 
channel through which receipts come in. 

The collection-clerk has charge of those items which 
are not payable on demand and credited at once as cash, 
but have to be held for maturity, as time drafts and notes. 
He keeps charge of these until the time comes for collec- 
tion, when they are turned over to the note-teller if pay- 
able in the city and to the corresponding clerk if payable 
out of town. The latter has charge of a very important 
department in connection with the work of collecting, as 
he keeps a record of all items to be sent away by mail and 
despatches them to their various destinations, whether 
they are checks to be paid on demand, which have been 
already credited to customers, or " time items," as drafts 
or notes, turned over by other departments, which are be- 
coming payable and have to be collected out of town. In 
some banks there is a mail-teller, who receives remittances 
that come in from these collections and accounts for them, 
but his work is subsidiary to that of the note-teller, and is 
blended with it in the final accounting. Where there is 
no mail-teller remittances are received by the correspond- 
ing clerk and by him turned over to the note-teller. In 
some banks, also, there is a separate coupon-clerk who 
attends to the collection of interest accruing upon bonds 
and represented by coupons, whether included in deposits 
or left for collection. Some of these may have to go out 
by the note-teller's messengers and some through the cor- 
responding department, but, as in other cases, the proceeds 
pass into the former's receipts to be accounted for. 



THE DEPARTMENTS OF A BANK'S WORK 45 

Some large city banks have a bond and stock depart- 
ment, which attends to the buying and selling of securi- 
ties for the bank or for its customers, but this is usually 
done through Stock Exchange brokers, the bond and stock 
clerk having charge of the details and of the records of the 
transactions. A few that deal largely in foreign exchange 
have a separate department for that work in charge of a 
foreign exchange clerk. 

Some of the departments already referred to have a 
certain relation to payments as well as receipts, but that 
which has direct charge of all the bank's cash payments 
and custody of its cash funds is that of the paying teller. 
His position ranks first in importance and responsibility 
among those subordinate to the cashier. He is the " first 
teller " and accounts for all payments and all the cash re- 
ceived or paid out. The receiving teller is the second 
teller and the note-teller is the third teller. In a large 
bank there is also an exchange-teller, who has immediate 
charge of the checks of the bank received from other banks 
through the clearing-house in exchange for their own. In 
a smaller bank these exchanges are looked after by the 
" check-clerk," who attends to all paid or returned checks. 

The work of all the departments concerned with either 
receiving, collecting, loaning, or paying converge upon the 
bookkeeper in whose department all final accounts of the 
bank's business are systematically kept. 

Quite independent of all these is the credit depart- 
ment, which everv bank that has a numerous clientele and 
a large volume of business in discounts and loans main- 
tains nowadays as a means of ascertaining, recording, and 
keeping in form for ready reference evidences of the finan- 
cial condition and standing of its customers. 

A few large and busy banks have an Information 
Bureau, in charge of a clerk whose main duty it is to 
answer questions and to have the oversight of the pass- 



46 THE MODERN BANK 

books of depositors when they are in the bank to be bal- 
anced, receiving them when presented for that purpose, 
seeing that the entries are duly and correctly made and 
returning them when called for. 

These departments cover in a general way the work 
that is constantly going on within the bank under the 
direction of the cashier as the executive head. There may 
be a chief clerk who under him has supervision of the 
clerical force, giving them general instructions and guid- 
ance, and settling points of doubt on matters of detail 
about which the cashier need not be troubled. There are 
assistant tellers and clerks, messengers, porters, and vari- 
ous employees whose number and duties are determined 
by the volume, character, and variety of the business of the 
particular bank. Though departments may be clearly de- 
fined in their main function, they come in contact at many 
points and there is much passing to and fro between them. 



VIII 

DEPOSITS AND THE RECEIVING TELLER 

However abundantly supplied a bank may be with 
capital and resources of its own, it relies mainly upon 
funds deposited with it by others for the means of carrying 
on an extensive business in discounts and loans. Once 
under way, what determines its capacity for loaning is the 
relation of reserve to deposits, and capital and surplus give 
assurance of its general ability to meet all obligations. 
As a rule, its deposits are several times its capital, while 
a considerable part of the latter is otherwise invested. 
Though a large line of deposits is desirable, more and 
more attention is given to their character and the prob- 
ability of profit from them. Much service is rendered 
in connection with deposits, and, depositors being regarded 
as customers in the bank's business, it is expected that a 
reasonable balance will be kept and that those who are 
liable to call for accommodation or become borrowers shall 
have a corresponding character and standing in the com- 
munity. Hence a large commercial bank requires some- 
thing more than an application for the privilege of mak- 
ing deposits and keeps a careful record of those admitted 
to its books. It has become a general practise to keep a 
card-index of depositors, arranged in alphabetical order 
in a cabinet of drawers. Upon each card is the depositor's 
name and address, and it is ruled in perpendicular 
columns for a series of years with a line for each month. 
Upon this is kept the average monthly balance to his credit, 

47 



48 THE MODERN BANK 

and at the foot of the column the average for the year is 
entered. With this may, be kept statements regarding the 
depositor's business and character, affording evidence of 
his responsibility and his title to credit, but in most large 
banks this material is kept separately in a credit depart- 
ment. Sometimes upon the balance-card is entered in red 
ink the discounts granted to the depositor in each month, 
showing their relation to the balance kept. This record is 
a guide to the value of the account. 

When a person applies for the privilege of becoming 
a depositor in a bank that is at all strict in its require- 
ments, unless personally well known or introduced and 
recommended, he is expected to present letters giving evi- 
dence of his character and financial circumstances, and a 
blank is filled out, with his name and address, his business 
and its location, and references to his sponsors. If his cre- 
dentials are satisfactory, his name is entered in the books 
and his account is opened. His signature is taken in one 
or more books kept for the purpose, or more commonly 
nowadays upon cards that may be pasted in the " signature 
books " in their alphabetical order. Usually more than 
one and sometimes several of these are required, that sig- 
natures may be conveniently verified in different depart- 
ments of the bank's work. His account being opened he 
receives a " pass-book " in which a running account is kept 
for his own guidance, and in this the bank is debited with 
every deposit as it is made. It is left from time to time to 
be balanced, and then the bank is credited on the opposite 
page with the payments that have been made on his checks 
and all charges to his account, so as to show the balance that 
is still credited to him on the bank's ledger. To make his 
deposit he fills out a blank " slip," a supply of which is 
always conveniently at hand, with the date and his name 
properly entered at the top. He enters separately on the 
slip the amount of cash and of each check or draft and a 



901 02 

DEPOSITED BY 


IN THE 

BANK OF THE METROPOLIS 


^ 




BILLS 
GOLD 
CHECKS 


C 

/ 


J-J'Q 




/ 


6/dr 



Deposit Slip. 



50 THE MODERN BANK 

footing of the total. If he has coupons to deposit, they are 
placed in separate envelopes provided for the purpose, their 
character and amounts being noted on the outside. Placing 
the slip and the funds in the pass-book where the entry is 
to be made, he presents this at the receiving teller's window. 
The receiving teller's qualifications and responsibility 
will appear from the character of his work. He must count 
the money and see that it is good, notice that each check is 
properly dated and filled out with the amount in writing 
as well as in figures and duly signed and indorsed, and 
that the amounts agree with those noted on the deposit 
slip. Little attention is given to signatures if they appear 
to be all right, for many of them will be unknown to the 
teller, but he is expected to scrutinize indorsements more 
carefully, especially if the deposit is not made by the 
customer in person, whose indorsement every check must 
bear. If there are checks not drawn to his order and bear- 
ing other indorsements, these may or may not be known, 
but the depositor's own name is the bank's only guarantee 
that he is entitled to the credit. If a customer whose ac- 
count is a small one and whose known financial responsi- 
bility is not high deposits an unusually large check, there 
may be some question about receiving it and giving him 
credit upon which he can draw before it is positively as- 
certained that the check is good, lest, if it should prove 
otherwise, he might not be able to make good the amount. 
The bank is merely put upon its inquiry and the teller 
has to exercise caution. He may question the depositor, 
or the check may be referred to an officer before actual 
credit is given, and the bank upon which it is drawn may 
be communicated with. Such precautions are likely to be 
taken, especially when there is a previous indorsement 
about which nothing is known. There is another case in 
which care is taken about indorsements. Sometimes joint 
accounts are opened in the name of two persons, either of 



DEPOSITS AND THE RECEIVING TELLER 51 

whom is entitled to deposit to it and draw upon it, and 
checks drawn payable to the order of one may be indorsed 
by the other, if it is so stipulated. 

The receiving teller, finding the funds offered to be in 
all respects acceptable and to correspond with the deposit 
slip, distributes the money and checks in compartments 
of his drawer, keeping the denominations of the former 
separate for convenience and legal tenders apart from 
bank-notes, writes the total upon a book before him with 
the name of the depositor and enters it upon the debit page 
of the pass-book, with the date and his own initial, puts 
the deposit slip upon a spindle, returns the pass-book to 
the customer and is ready for the next in line. It should, 
perhaps, be explained that the pass-book, representing the 
depositor's side of the transaction, contains the bank's 
account with him, not his account with the bank, so that 
the sums deposited being due to him are entered as debits 
of the bank. The entries in the teller's " deposit book " may 
be made as the deposits are received, or they may be made 
afterward from the slips by himself or an assistant, but 
the record must be carefully kept. The slips afterward 
go to the bookkeepers for the entry of credits in the 
ledgers, the money is passed over to the paying teller in 
the course of the day or after the close of banking hours, 
with a proper exchange of vouchers, and the checks and 
other items that are to be collected or paid take different 
courses w T hich we shall have occasion to trace hereafter. 

Just here let us consider what may be deposited and 
immediately credited besides actual cash. There may be 
checks drawn by other depositors on this same bank, 
checks upon other banks which are members of the same 
clearing-house, checks upon banks or trust companies which 
are not members but make exchanges through some bank 
that is a member, checks or drafts upon banks, trust com- 
panies or other concerns from which direct collection will 
5 



52 THE MODERN BANK 

have to be made, sight drafts upon individuals or business 
houses in town, checks upon banks and drafts upon per- 
sons or concerns out of town. There may also be matured 
interest coupons, and almost any authenticated item that 
is payable or collectable on demand, even including a 
matured note payable at a bank, provided a certification 
has been obtained at that bank insuring its payment. 

It is obvious that while all these are received from 
the depositor and credited to his account as if they were 
cash, there is much to be done with them before the pro- 
ceeds are realized, and the receiving teller must set them 
upon their proper course and give a strict account of their 
passage through his hands. The money, properly classified 
by kind and denominations, goes to the paying teller and 
is charged to him and receipted for. The checks upon his 
own bank are kept apart to be charged as debits to the 
accounts upon which they are drawn ; the checks to be ex- 
changed through the clearing-house form another lot and 
much the largest, and those items that have to be col- 
lected in the city are turned over to the note-teller, while 
those that are to be collected out of the city go to the cor- 
respondence department, the former being called " city " 
and the latter " foreign " collections. The receiving teller 
has a case of pigeonholes in which to distribute this ma- 
terial preliminary to disposing of it. There is a pigeon- 
hole for the checks of each of the clearing-house banks, 
arranged in the order of their numbers as members of the 
association, and the teller or an assistant must assort the 
checks preparatory to listing them for the clearing-house 
settlement. 

The receiving teller has a " rack " of slips upon which 
to enter the several items of his day's receipts. There is 
one for each of the clearing-house banks with its clearing- 
house number and its name at the top, followed by 
" from " and the number and name of his bank, and a 



DEPOSITS AND THE RECEIVING TELLER 53 

space for the date. Upon each of these he enters a list 
of the checks of the bank whose name and number it bears, 
the checks having been distributed to the pigeonholes for 
the purpose, and then foots up the total. This gives him 
the material for drawing up a list of the aggregates for all 
the banks, which he does upon a strip of paper by means 
of the arithmometer, or adding-machine. This, as the 
reader is doubtless aware, is a mechanism on the principle 
of the typewriter and cash register combined, by which 
the separate numbers are impressed successively on a strip 
or a sheet of paper by the use of keys and a lever, and the 
aggregate is at the same time so kept that it can be in- 
stantly inscribed at the bottom of the column by a double 
movement of the lever which is drawn once in entering the 
separate items. It makes the listing a rapid process with 
one clerk calling off the figures and another operating the 
machine. Where there are many checks it may be used 
in listing those of a single bank on its separate slip, but 
its chief use is in making the list of aggregates for all the 
banks and footing it up mechanically. Unless it is out of 
order the machine can not make a mistake in adding or in 
entering the amounts indicated by the keys struck, but the 
operator may cause an error by striking the wrong key. 
The extent to which this contrivance is used differs greatly, 
but it is commonly employed where long lists of figures are 
to be made and footed up. 

The clearing-house checks are thus listed as a matter 
of record and preparatory to the process of clearing, here- 
after to be described. The teller also enters upon one of 
his rack-slips all the items turned over to the note-teller 
for collection and upon another those sent to the correspond- 
ing clerk. He also has a slip for the actual cash, or money, 
taken, the kinds and denominations of the money being 
noted as well as the total. This cash is made up in packages, 
perhaps by an assistant, and labeled with the amounts, for 



54 THE MODERN BANK 

the use of the paying teller, but the receiving teller must 
keep an account of all that passes through his hands. He 
also has a list of the checks drawn upon his own bank, 
which can be immediately debited to the accounts upon 
which they are drawn and go at once to the bookkeeper's 
department. 

A process which is required wherever evidences of re- 
ceipt or payment pass through the hands of a teller or clerk 
is known as " proving " or u making a proof." It consists 
in setting the items covering a total amount into different 
categories independently and seeing that they agree ; and 
often " proofs " have to be made between different de- 
partments serving as a check upon errors. The receiving 
teller keeps two books, a deposit-book and a proof-book. 
In the former he makes a record of all the deposits 
made each day and credited to the depositors. In the 
latter he records his proof of each day's work when it is 
completed. This is made by entering on one side the total 
of deposits and of receipts from any other source, for he 
may receive money sent in by express or turned over for 
one cause or another by the first or third teller. Against 
his total receipts he sets the amount of clearing-house 
checks or " exchanges/' checks on his own bank, or 
" debits," " foreign items," and city items turned over for 
collection, and " charges " to first and third tellers, and 
the cash or money in hand. This should account for the 
whole amount and so balance with it. This process com- 
pleted, the receiving teller's work for the day is done, but 
in the morning he will have to attend to making up the 
" exchanges " for the settlement clerk to take to the clear- 
ing-house. 

He has upon the left-hand margin of each day's page 
of his proof-book a list of the clearing-house banks in the 
order of their numbers as members of the association, and 
against each has been entered the amount of its debit 






2d Teller. 



PROOF. 



THE EIGHTH NATIONAL BANK. 







Deposits, . . . . 


tto/ 


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Money " by Express, 


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/ 


Rec'd from 1st Teller, 


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Collection Exchange, 




3 


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Foreign " 


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Charged to 1st Teller, 








" 3d kt 








Morning Adds, . . 








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3S0 


S8 



Receiving Teller's Proof. 



56 THE MODERN BANK 

to this bank for the day, represented by its checks. Each 
check is stamped upon the back with a receipt-stamp, 
bearing the number of the bank which has received it and 
is now sending it back, the date and the legend " re- 
ceived payment through the Clearing-House." The settle- 
ment-sheet, finally made up the next morning, has a 
similar list of banks, but the aggregate set against each 
includes the checks received by the note-teller as well as 
the receiving teller and additions coming by mail in the 
morning, or any early deposits that it may be desirable to 
put through that day. In some clearing-houses the morn- 
ing " additions " appear in a separate column, with a 
third column for the aggregate credits of the bank, to be 
entered against each of the others. Not all banks have 
the practise of including the list of banks and the debit of 
each in the proof-book. 

Among the depositors of such a bank as we are con- 
sidering will be not only individuals, but business firms, 
corporations, savings-banks, trust companies and other 
financial institutions, out-of-town banks, some of them in 
distant parts of the country, and perhaps the financial 
departments of the local or State government, or even the 
Treasury of the United States. Sometimes interest is 
paid where large balances are kept, but that is a matter 
of special arrangement. On ordinary deposits no interest 
is allowed by conservative banks, and in many cases the 
matter is regulated by a clearing-house rule for banks that 
belong to the clearing-house association. The rate is in 
that case prescribed together with the minimum balance 
upon which it is allowed, but in most places it is left to the 
discretion of the banks. 

The depositor is now entitled to draw checks upon his 
deposit with which to make payments, and these may be 
indorsed by the recipient and deposited in the same or 
another bank, or presented for payment to the paying 



■' 



DEPOSITS AND THE RECEIVING TELLER 57 

teller. This statement should be qualified by saying that 
in case of a new depositor or one about whom little is 
known, the bank may defer honoring drafts upon the ac- 
count until the checks included in the deposit are proved 
good by being accepted as such by the banks upon which 
they are drawn. There is such a thing as " kiting checks/' 
or depositing one drawn by an accommodating friend for 
the purpose of immediately drawing cash upon it, when 
it may not turn out to be good. If there is any suspicion 
of that, the game may be balked by waiting for the de- 
posited check to prove itself all right before accepting that 
drawn against the account. In these days of telephone 
communication the kite-string may be easily cut. 

The bank will furnish a book of blank checks, as well as 
the pass-book, and each bank has a form of its own more or 
less tastefully designed and printed, and books of different 
sizes to meet the needs of its various customers. But any 
depositor may have a design of his own, if he likes, and 
have his own check-books made with the name of his bank 
printed upon each check with the customary legend of 
" pay to the order of." A check written upon a plain 
piece of paper, as an order to pay, will be perfectly good, 
if there is no doubt about its genuineness. In the check- 
book each blank check has a stub from which it can be 
detached, and upon this there are spaces for entering the 
balance, the date, the number of the check drawn, the 
name of the payee, the amount, and the balance remaining. 
Upon this the depositor can keep a record for himself by 
'which to verify the entries in his pass-book. In drawing 
checks he should number them consecutively, though that 
is not necessary, and be careful to insert the correct date, 
write the amount to be drawn plainly, and. enter the same 
amount in figures and sign in his ordinary handwriting. 
Though indorsing with a stamp is permitted, a signature 
must always be hand-written. Many business houses and 




o 



s 



ft 
O 

o 



DEPOSITS AND THE RECEIVING TELLER 59 

corporations and most banks use a stamp for indorsements. 
If the amount written on the face is different from that en- 
tered in figures the former controls. Care should be taken 
not to change the date or amount after it is once written, 
as doubt will be raised when the check comes to the bank 
whether the change has not been made since the check 
was drawn and by another than the drawer. This may 
be obviated by noting the change with signature or 
initials, but it is best to draw a new check. 



IX 



THE NOTE-TELLER AND HIS RECEIPTS 

Not all of the receipts of the bank come in the form 
of deposits at the receiving teller's window, and, though 
the note-teller has more important relations to other de- 
partments, to be considered hereafter, we will give a pass- 
ing glance to his share in the receipts, because they take 
practically the same course in the interior of the bank 
as those of the receiving teller, and it is desirable to fol- 
low those which go through the clearing-house without 
delay. At the risk of anticipating, and even of repeating 
to some extent, the matter can be made clearer by this way 
of advancing over the ground. We have already seen that 
certain items included in deposits must be turned over to 
the note-teller for collection. If there are sight drafts 
or checks upon trust companies or upon banks that do not 
" clear/' to be collected in the city, he makes a proper 
entry of them and sends out messenger or collectors to 
collect the several sums. As these are payable on demand 
it is presumed that they will be paid without demur, but 
if there is a refusal the item is returned, and charged to 
the depositor's account and notice is sent to him with the 
dishonored draft or check. Payments may be made in 
cash or in checks payable to the bank. If the latter is 
the case, it is the rule that the checks must be such as can 
be exchanged through the clearing-house, unless drawn 
upon the collecting bank itself, but sometimes checks will 
be taken that have to go through the process of a second 
60 



THE NOTE-TELLER AND HIS RECEIPTS 61 

collection. Trust companies and banks that do not 
" clear " commonly keep deposits in banks that do, and 
make their payments by drawing upon them. 

The proceeds of these city collections come into the 
hands of the note-teller, usually designated in the bank as 
the " third teller/' and are accounted for in much the 
same way as the receipts of the receiving or second teller ; 
but he is also in receipt of payments upon notes and loans, 
and remittances from out-of-town collections come to him 
through the correspondence department or the mail- 
teller. These payments come mostly in checks, and we 
are here concerned not with the business of the depart- 
ments which attend to the collection of " time " or of 
" foreign " items, but only with the actual receipts when 
payments are made. It is with these that the note-teller 
has to do, precisely as the receiving teller has to do with 
the funds deposited. He receives money and checks from 
messengers making collections for the " city office," from 
customers paying on account of discounted notes or loans, 
and from collections out of town through the correspond- 
ence department, and these he has to account for in sub- 
stantially the same way that the receiving teller has to 
account for his receipts direct from depositors. He has 
in his charge the " supplementary " credit and debit books 
in which the entries are made of credits and charges from 
his department. The relation of these to the bookkeeping 
department will appear more clearly hereafter, but for 
the present we are interested in the funds which pass 
through the third teller's hands. There is cash and there 
are checks upon his own bank and upon other clearing- 
house banks, and there may be other checks or drafts, to 
take another turn at collection. He makes up his total 
receipts and the classified items and prepares a " proof " 
similar in form to that of the second teller. His cash goes 
to the first or paying teller, and his checks must be assorted 



62 THE MODERN BANK 

and listed upon " rack " slips, and he, too, makes up a list 
of clearing-house " exchanges " to be added to those of the 
receiving-teller on the " settlement-sheet." 

If the bank has a large number of correspondents and 
does a heavy business in out-of-town collection, it may 
have a separate mail-teller. In that case the note-teller 
deals only with the collections and payments made in the 
city, and the mail-teller, or fourth teller, receives the out- 
of-town remittances ; but when the latter has duly recorded 
and accounted for them, the proceeds are turned over to the 
note-teller to be included with other entries in his books, 
and they enter also into his " proof " and upon his clear- 
ing-house list. Many of these appear as morning " addi- 
tions," the regular teller's lists being made up at night. 

Interest coupons have been mentioned as among the 
items to be collected. Many banks in a large city which is 
a financial center have a separate coupon-clerk to record 
these and attend to their distribution for collection, some 
going out by the note-teller's city messengers and some out 
of town through the correspondence department, but the 
proceeds enter into the note-teller's account. Having got 
these various items of the bank's receipts together, in 
which checks upon clearing-house banks or institutions 
that clear through them figure prominently, we are pre- 
pared to follow the interesting process of " clearing," and 
appreciate how much it signifies in facilitating the ex- 
change of values by means of credits and debits. 



X 



EXCHANGES THROUGH THE CLEARING-HOUSE 

The association of banks to support clearing-houses 
and for other purposes will be treated in a subsequent 
chapter, after we have become more familiar with their 
varied functions, but this is an appropriate place in our 
progress for describing the process of " clearing," or ex- 
changing the checks which have been received in deposits 
and in payments to the bank. As New York is the bank- 
ing center of the United States and the clearings there 
usually constitute more than three-fifths of the volume for 
the entire country, the description will apply especially to 
the method pursued there, but variations upon it in other 
cities will be noted afterward. The immediate purpose 
is to see how the checks and other " clearing items " are 
disposed of. Besides checks upon banks that are members 
of the association or institutions that have the privilege 
of clearing through members, drafts payable at clearing- 
house banks or even matured notes may be passed through 
these exchanges if they have been certified or " accepted " 
by those banks beforehand as so payable. 

It should be noted here that many banks and trust com- 
panies which do not belong to the Clearing-House Associa- 
tion obtain the privilege under its rules of having their 
checks exchanged through members with which they make 
arrangements for the purpose, and these checks are treated 
precisely as if they were drawn upon the bank which does 
the clearing, and it becomes responsible for their payment. 

63 



64 THE MODERN BANK 

In many cases the institution so situated keeps a regular ac- 
count as depositor with the bank acting as its clearing- 
agent, and deposits with it the checks it has received, which 
then have to be assorted and listed with those of the clear- 
ing-bank. In other cases they are assorted at the bank re- 
ceiving them and sent in listed by themselves to be included 
in the morning " additions." Every bank in the associa- 
tion has to keep a careful record of these non-member 
banks and their clearing arrangements so as to include 
their checks received among deposits with those of their 
clearing-agents in making the exchanges. In New York 
there is a charge of one dollar for every check that has to 
be returned as " sent wrong/' though the charge on any 
single batch can not be more than five dollars. 

When a man draws his check upon his bank it is 
simply an order to the bank to make payment on his ac- 
count. When the one who receives the check deposits it 
in another bank he turns the order to pay over to that 
bank and it undertakes to collect the amount from the 
first bank, which is assumed to make the payment for its 
own depositor and charge it to his account. But as each 
bank receives many checks drawn upon several others, and 
each of those others has checks drawn upon it, instead of 
making collections all around, each exchanges the checks 
it has received drawn upon the others for those they have 
received drawn upon it, and only the balances are settled. 
By all meeting at the Clearing-House they can ascertain 
the aggregate balance to be paid or received, instead of 
dealing with each separately, and the Clearing-House 
officers and clerks will attend to receiving the payment of 
all balances due, or " debit balances," and making pay- 
ment of all " credit balances," thus reducing to one opera- 
tion the settlement for all the banks. This will clearly 
appear as we proceed. 

We will now start with one of the banks. The hour of 







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66 THE MODERN BANK 

clearing in New York is ten o'clock and the final settle- 
ment-sheet is made up in the morning, to include all the 
" exchanges " of the previous day and any early " addi- 
tions/' so that a single entry may be made of the amount 
due from each bank. The sheet has printed upon its left- 
hand margin a list of the Clearing-House banks by number 
and name in consecutive order, and next to this a column 
headed " debits." In this column is entered against the 
name of each bank the amount due from it on its checks 
and the other items that it is bound to pay, and the footing 
shows the total credit of the bank presenting the sheet, or 
the total amount due to it from all the other banks. Some 
banks use a settlement-sheet with two debit columns, the 
morning " additions " being separately entered, but the 
total will include all the items. A " credit-ticket " for 
this total amount is prepared, to be delivered to the clear- 
ing-house manager or his " proof-clerk." The checks of 
each bank are enclosed in a strong envelope with a list of 
the amounts of the several checks and the total on the 
outside. A small " check-ticket " accompanies it, bearing 
the number and name of the bank to which it is to be de- 
livered and those of that making the delivery and the total 
sum of the enclosed checks. On the sheet next to the debit 
column, already filled and footed up, is a column headed 
" credits," in which is to be entered at the Clearing-House 
the amount due from this bank to each of the others as it 
appears upon their several returns. 

When the sheet is ready for the Clearing-House it is 
taken in hand by the " settling-clerk," who is accompanied 
or followed to the Clearing-House by a delivery-clerk. The 
latter takes the envelopes, arranged in consecutive order, 
beginning from his own number and running through the 
list to the end and down to the number again from the 
head, unless the bank should chance to be No. 1. The 
envelopes are carried in a convenient receptacle, the size 



EXCHANGES THROUGH THE CLEARING-HOUSE 67 

and form of which are determined by the volume of the 
bank's exchanges. The delivery-clerk also has the " credit- 
ticket/' small " check-tickets/' and a duplicate of the set- 
tlement-sheet with the debit entries and a column in which 
the clerks of the other banks are to receipt for their several 
envelopes when delivered. The settling-clerk may also 
have an assistant, or more than one if necessary, the most 
important duty of whom will be receipting for the en- 
velopes to be delivered by the other banks. Arrived at 
the clearing-house, the settling-clerk takes his seat at his 
own desk with his assistant, if he has one, at his back, or 




No. 61. ?0w-$0ifc (Hearing §£01100, 

.1903 



Z^ 



Credit Fourth National Bank, <& ^3o/ m £>*t- Z^ 



Settling Clerk. 



— L^ 

Clearing- House Credit-Ticket. 

by his side, and his sheet before him. The delivery-clerk 
passes the " credit-ticket" of his bank up to the manager's 
clerk in the gallery and takes his place with his bag or 
case of envelopes, his duplicate-sheet and his check-tickets, 
in the passage in front of the desk of his bank. 

Before proceeding further, let us glance at the ar- 
rangement of the room from the manager's gallery at the 
end. The manager and his assistant have a narrow desk 
in the front of the gallery facing the room, and near by 
is the desk of his " proof -clerk " with an open book, whose 
page for the day, like the settlement-sheet, has the list of 
banks by number and name, and columns for " debits " 
and " credits." It has also two columns for balances, one 
6 



68 THE MODERN BANK 

for those " due Clearing-House/' and one for those " due 
banks." There is a little endless-chain arrangement by 
which the credit-tickets have been sent up by the delivery- 
clerks as they come in, and from these the manager's clerk 
enters the credits in the book as he finds them on the 
tickets of the different banks and makes his own footing 
of the totals. Looking from the gallery to the floor we 
see the desks arranged in four rows, each divided from 
the next by a latticed wire partition. Behind each sits a 
settling-clerk with his sheet before him and an assistant 
at his elbow and, it may be, another standing by. In front 
stands a delivery-clerk with his receptacle on his arm and 
his delivery-sheet in his hand, and if his task is heavy he 
too may have an assistant, a messenger or porter from 
his bank. 

The manager, or his assistant, appears in the gallery 
and one minute before the hour of ten strikes a gong. 
Everybody is at attention and on the alert. On the hour 
the gong sounds again and the lines of delivery-clerks in 
the passages along the front of the desks begin to move. 
Each clerk moves to the next desk and delivers an envel- 
ope, lays down his sheet in front of the clerk sitting there 
and drops a check-ticket into a slot in the top of the desk. 
The settling-clerk takes the envelope and begins to enter 
at once from its outside the credit of the bank from which 
it comes, while his assistant puts his initials upon the 
duplicate-sheet in token of receipt. Meantime the de- 
livery-clerk has placed an envelope on the next desk, 
reaches back for his sheet and places that there for his 
receipt and drops a check-ticket in the slot. This is going 
on all along the four lines of desks and is a continuous 
movement of ten or twelve minutes, when each delivery- 
clerk is before his own desk again with his receptacle for 
envelopes empty, while the settling-clerk has before him 
all the envelopes delivered to him by the other banks, and 



EXCHANGES THROUGH THE CLEARING-HOUSE 69 

either has all their debits entered in his credit column or 
is still engaged upon the process of entering them. Each 
bank has back its own checks from all the others and has 
a receipt for them in the line of initials on the delivery- 
sheet, and when the settling-clerk is through making 
credit entries from the envelopes, these, containing the 
bank's own returned checks, are gathered into the empty 
bag and taken to the bank without delay, the " check- 
tickets " being now used to verify the entries. 

The settling-clerk foots up the credits which he has 
entered to the several banks and strikes a balance of the 
aggregates. If this is a credit balance to his own bank, 
it shows the amount due from the Clearing-House. If it 
is a debit balance, it shows the amount his bank has to 
pay to the Clearing-House. As soon as he has ascertained 
this, he fills out a " balance-ticket," entering the amount 
received, the amount brought, and the balance, and sends 
this up to the manager's proof -clerk, who is busily entering 
all the credits and debits of the several banks and strik- 
ing a balance in each case and entering it in the proper 
column. The aggregates of his balances should be the 
same as those of the settling-clerks, and the balance for 
each bank should correspond to that appearing upon its 
ticket; otherwise there is some error to be corrected. 
The manager calls off the several balances for verification 
and for report to the banks. Forty-five minutes is 
allowed for completing the " proof," and fines are im- 
posed upon the delinquent clerks for any error or delay. 
The settling-clerk makes a report to his bank on another 
sheet showing all the debits and credits, the aggregate and 
the balance due to or from it. 

The settlement of the balances remains to be effected, 
and every bank having a debit balance is required to pay in 
at the Clearing-House between 12.30 and 1.30 o'clock the 
amount thus due from it. Payment must be in cash avail- 



70 THE MODERN BANK 

able for reserves, but this includes Clearing-House gold 
certificates, and a large part of the settlements are made 
with these. Each bank has on actual deposit in the Clear- 
ing-House vaults gold coin for which certificates are issued 
that can only be used in settling balances between the banks. 
The certificates are numbered and dated, and on the face 
certify to the deposit of so much United States gold coin 
which is payable to the order of the bank making the 
deposit on demand of any member of the Clearing-House 
on surrendering the certificate indorsed by the bank de- 
manding payment. On the back is also the number and 




No. 61. i*u^i)0*fe terittg §ou$t t 



■ 



Detit FOURTH NATIONAL BANK t Am't we'd, $ 3^ & ^. or^f.30 



Credit " " " brought. % 4*3o / ^ 4s: 2-+6 



-DebCt Balance Due Clearing House. 



cr. bai. due FOURTH NATIONAL BANK, %jfo&j$j£ja^ 

.Settling Clerk 



Clearing-House Balance Ticket. 

a space for the date, with the order " Pay only a Bank, mem- 
ber of the New York Clearing-House Association/' and 
notice of a fine for any other use of it. Certificates may also 
be issued for gold deposited at the Sub-Treasury and used 
in the same way. Government coin-certificates and legal- 
tender notes are also used. 

The money paid in is made up in packages according to 
denominations and properly labeled, the coin being in bags, 
and a receipt is given to each bank, signed by the manager. 
In case any bank fails to appear to make its payment, the 
banks to which it owes balances must each furnish its quota 
of the balance necessary to complete the settlement and 
must make their own settlement with the defaulting bank 



)<l^^^5)2^S<fe^3@^ 




72 THE MODERN BANK 

afterward. The banks having credit balances are required 
to appear at 1.30 o'clock to receive the amounts due. These 
are paid over by the manager and receipted for in a book, 
and when the process is over every dollar of the money paid 
in by the banks owing balances has been paid out to those to 
which balances were due. It should be mentioned that the 
United States Sub-Treasury has the privilege of clearing 
through the Clearing-House, though not a member, as that 
is an accommodation to the banks as well as to itself. It 
receives bank-checks in payment of various Government 
dues, and issues checks in paying interest, premiums, etc., 
which are deposited in banks. It is necessary to have these 
exchanged from day to day. When the Sub-Treasury has 
a credit balance, it takes that much money away from the 
banks and locks it up. When it has a debit balance, it 
pays out that amount from its surplus funds and it goes 
into the banks. A complete and careful record of each 
day's clearings is kept by the manager of the Clearing- 
House and his clerks. 

The principle and purpose of the clearing process is 
the same everywhere and there is no essential difference 
in the manner of making the exchanges. At New York 
the volume of clearings sometimes reaches about $1,500,- 
000,000 a week, while those of all the rest of the country 
are less than $1,000,000,000. In some of the other clear- 
ing-houses the time of meeting, the detailed methods, and 
the mode of settling balances are different from those of 
the metropolis. Few, if any, of them have a building of 
their own, and some of the smaller ones only rent a room 
for their purpose. In a few cases there is more than one 
meeting in the day, an early one for exchanging the checks 
received the day before, and a later one for additional 
items received in the morning or certified as payable on 
the day of the meeting. Any funds to be deposited against 
which certificates are issued are kept in a bank or some 



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74 THE MODERN BANK 

other depository. In some cases bank-notes may be in- 
cluded in the funds used in settling balances, and in others 
arrangements are made for running accounts between the 
banks and transfers of balances. In Boston there is a 
practise of loaning credit balances among the banks, and 
in Philadelphia due-bills may be given for balances below 
$5,000. These are simply acknowledgments signed by a 
bank that so much is due. They are good for only the 
day's settlement, and are deposited in a bank by the Clear- 
ing-House manager and passed through the exchanges the 
next day. 

The present purpose being merely to show how the 
exchange of checks is made, further consideration of 
clearing-houses will be deferred to a subsequent chapter. 
What should clearly appear at this point is the immense 
volume of actual payments that are consummated through 
the banks by the use of checks, with no use of money ex- 
cept as a small part of their deposits by customers, and 
with comparatively little use of it by the banks. It is an 
imposing illustration of the extent to which mere orders 
to pay accomplish the purpose of currency in effecting 
the interchange of values, bringing the mind back to the 
idea that what is virtually effected is a barter of values 
on a vast scale. 



XI 

COLLECTING OUT-OF-TOWN CHECKS 

The receipts of the bank in the form of checks is not 
yet fully accounted for. Those which are drawn by one 
of its own depositors for payment to another and deposited 
with it by the other merely effect transfers between their 
accounts, the amount being " charged/' or debited, to the 
account of the drawer and credited to that of the drawee 
or second depositor. Those deposited with it which are 
drawn upon other banks belonging to the clearing-house 
or using its facilities are exchanged through that institu- 
tion, as we have just seen. Those drawn upon banks, trust 
companies, private bankers, or others in the place where 
the bank is situated and not exchanging through the Clear- 
ing-House are collected directly by messengers under the 
direction of the note-teller, as we had previously seen. 
But there are still the checks drawn upon banks in other 
places to be accounted for. The practise of making pay- 
ments with checks upon banks has so extended and is found 
so convenient that little heed is given to distance or to the 
trouble that may be involved in making collections. 

A man in a western or southern city or in a remote 
country town who has a bill to pay in New York does not 
hesitate to draw a check upon his local bank and send it 
by mail. A man in New York who has a payment to 
make in a distant city or town in like manner draws his 
check and sends it along, with the feeling that the matter 
is settled to all intents and purposes. The same is true be- 

75 



76 



THE MODERN BANK 



^D>!Y 



**£:;2?^ 



Endc 



!o «*ment 



G aa 



,T *nteed m 



fefc 



^AW /> , l^TNAfrCOUNT OF 

HOWttf' Nfrtiflfc BANKER. 



to' 



tween all manner of places, near or remote, payments 
naturally going most to trading-centers from places tribu- 
tary to them or dealing 
with them, but moving 
also on diverging lines 
from them and on con- 
necting lines between 
them. There is a vast 
network of routes over 
which checks are going 
to and fro all the time 
through the mails; but 
the actual payment is 
not made when the 
check is sent, though it 
is left to the banks to 
see that it comes to 
that. Therein they per- 
form one of their most 
troublesome and least 
appreciated services. A 
man in New York may 
receive a check for some 
small payment, drawn 
upon a bank in a little 
town in Kansas or 
Oregon. He indorses it 
and puts it in his bank 
with assurance that it is 
all right and gives him- 
self no more trouble 
about it. 

Not so the bank. It 
has practically paid the 
depositor by crediting 



A @a : ORPE 



Boston, or order. 

^fk WWW YORK. 



Pay 



PAY Tj^TH^0©ER OF 
»KY.NAT2Q&S1JTEB$&ns 

BANKER^ r&JSt • CO. • 

The se?ond Nat&naVBank 

OF HOBOKEW. 
PRIOR ENDORSEME^^uJvKANTCE^ 

Pay Any National or State Bank. 

OR ORDER, 

GLOBE NAT'L BANK. BOSTON 

mmmmm JQOffF Cgihfr>' 



J 



Back of Collected Check, with In- 
dorsements of Banks and Bankers 
through whose hands it has passed. 



COLLECTING OUT-OF-TOWN CHECKS 77 

him with the amount of the check, but it must get its 
pay from the bank upon which the check was drawn, 
which must get its pay by charging it to its own depositor 
who drew the check. But the New York bank has no rela- 
tion with the remote country bank and it stamps its indorse- 
ment on the check with an order to pay a bank with which it 
has relations in Chicago or St. Louis, guaranteeing pre- 
vious indorsements, and sends it along with others for collec- 
tion. It gets credit and acknowledgment in due time, but 
the Chicago or St. Louis bank still has the collection to 
make and may have no relation with the bank upon which 
the check is drawn. It has to go through the process of 
making the necessary entries in its own books and sending 
the check with its own indorsement to some correspondent 
near the remote town. The process may be repeated sev- 
eral times before the strip of paper reaches its destination, 
with its back covered with bank indorsements, and the 
payment is actually effected. The check may be indorsed 
" Pay to the order of any national bank," or " any bank or 
banker/' and sent to the most convenient point on its way, 
with confidence that it will ultimately reach the account 
of the drawer, and, if good, the settlement will be made. 
If not, it will be sent back protested and charged to the 
depositor in New York with the costs of the whole opera- 
tion. In any case, the cost of collection is charged back 
along the line until it reaches the depositor on whose ac- 
count it was incurred. 

This case is an extreme one but illustrates the meaning 
of collecting " country checks." The volume of this busi- 
ness of collecting out-of-town checks by a large city bank 
is very great, and such banks have correspondents in 
different parts of the country through which these and 
other " foreign " collections are made by means of their 
correspondence departments. Most of these correspond- 
ent banks keep regular accounts with a bank in New 



78 THE MODERN BANK 

York, and make deposits with it, including the New York 
checks they receive, which is equivalent to sending them 
to it for collection. Similar arrangements are made with 
other cities, but New York is the chief center and has con- 
nections of the kind with all important banking places in 
other parts of the country, and with many smaller places 
near by. An account of the methods pursued by a promi- 
nent New York bank in making these collections will cover 
the whole ground, and suggest the less elaborate ways that 
may serve the purpose where business is less voluminous 
and complicated. 

This bank keeps regular ledger-accounts with its cor- 
respondents similar in form and method to those for in- 
dividual depositors, but arranged alphabetically by the 
names of places, in which they are credited with their 
deposits and the sums received from them from time to 
time, and charged with payments made on their account. 
Different arrangements are made with correspondent 
banks as to remittances and settlements and the terms upon 
which the business is done, varying with its character and 
volume. The New York bank may act as the reserve 
agent for some of these out-of-town banks and may have 
considerable deposits belonging to them. Upon some it 
may allow interest. It may itself keep a deposit account 
with some bank in an important Western or Southern city, 
like Chicago or New Orleans, for the convenience of its 
business. It has an index of its correspondents in card- 
catalogue form for convenience of reference, and upon 
each card is inscribed the terms of the arrangement it has 
with the correspondent. With this may be filed other in- 
formation about the out-of-town bank and a memorandum 
of the average balance it keeps and the general condition 
of its account. The arrangement may involve keeping the 
funds collected and making remittances at intervals, with 
regular periods of settling accounts, or it may require 



COLLECTING OUT-OF-TOWN CHECKS 79 

remittances to be made without delay. It depends upon 
the amount of the business and the particular relations 
established between the banks, but in any case prompt 
acknowledgment is expected of all items received for col- 
lection. Another alphabetical card-index is frequently 
kept of cities and towns arranged by sections of the coun- 
try, covering all places where there are banks or where 
collections may have to be made, with their proximity to 
the more important places noted on the cards. This is to 
enable the bank, when any item appears from an obscure 
or out-of-the-way place to ascertain at once where that 
place is and to what city the item should be sent to se- 
cure collection with the least delay, for in many cases it is 
not sent to a regular correspondent, but to any bank in the 
right part of the country. 

All these provisions for making " foreign collections " 
being presumed, we may return to the process of having 
them made. This comes within the province of the bank's 
correspondence department, and for the present we are 
only concerned with checks that have been deposited, 
though they are by no means the only " items " to pass 
through this department. 

We have seen how the receiving teller disposes of 
checks upon his own bank, upon other clearing-banks, and 
upon institutions in the city. Those upon out-of-town 
banks which he receives, or which the note-teller may take, 
or which may come to the bank in any form of payment, 
are turned over to the corresponding-clerk. He makes a 
record of these in a book kept for the purpose, with names, 
dates, amounts, and the names of the banks upon which 
they are drawn and the correspondents to which they are 
to be sent. Some banks keep this record by a duplicate of 
the letters of transmission, which are in the form of a 
double sheet, so that two copies are made at once by plac- 
ing a carbon-sheet between the leaves, one copy being de- 



80 THE MODERN BANK 

tached for the mail and the other kept on file. The checks 
are assorted and arranged alphabetically by the places to 
which they are to be sent and the bank's indorsement is 
stamped on the back of each. There is a series of stamps 
for this use. Checks that are going to regular corre- 
spondents are indorsed " Pay to such and such a bank." 
Others may be indorsed " Pay to any national bank/' or to 
" any bank or banker/' or the name of the bank to which 
it is sent may be written in a blank space. The essential 
point is to transfer the order to pay with a guarantee that 
previous indorsements are valid. The stamp bears the 
name of the bank and its cashier, who is the real indorser. 
Before the checks are sent away, or as soon as they are 
despatched, the amounts are charged to the several corre- 
spondents, or collecting banks, under that date in the ledger 
kept for the purpose. This is known as the " collection 
ledger/' or sometimes the " foreign ledger." The bank 
has practically paid these checks and now looks to the 
correspondent for its payment. 

When the correspondent, or collecting bank, receives 
the checks it credits them to the bank from which they 
come, sends a letter of acknowledgment, enters the items 
in its own books and makes the collections, with others 
that it may have to make, in the regular way. If any of 
them are drawn upon itself, they are debited to the 
depositors who drew them. If there is a clearing-house 
in the place and any of them are drawn upon other mem- 
bers, they go through its exchanges. Where there is no 
such exchange they are presented for payment. If they 
are drawn upon banks in other places they are forwarded 
for collection with a new indorsement. Payments are 
thus gathered in until the accounts of original drawers 
of all the checks are reached and charged and remittances 
are duly made from bank to bank. When these reach New 
York they are credited on the ledger to the various corre- 



COLLECTING OUT-OF-TOWN CHECKS 81 

spondents or collecting banks which were first charged 
with the amounts to be collected. 

Formerly all this work was done for depositors with- 
out charge, but the New York Clearing-House Associa- 
tion and those in some other cities have established 
charges for collection, usually one tenth of one per cent, 
but not less than ten cents for any item, and the correspond- 
ents may also make charges for collecting beyond their 
own jurisdiction. The practise differs in different places 
and with banks not subject to Clearing-House rules, but it 
may be stated as a general practise that there is a small 
charge for collecting " foreign " checks, which is usually 
designated as " exchange/' The correspondents remit the 
amount of the check received less their exchange 
charges, but are credited with the full amount, the ex- 
change being entered as a separate item in the credit 
column of the ledger opposite the original charge, and the 
date of receipt is noted. The exchange is charged up to 
the depositors for w r hom the collections are made in the 
debit columns of the individual deposit-ledgers before 
this settlement is complete. Thus it will be seen that 
while the depositor is credited at once with everything that 
is accepted at the receiving teller's window for his account, 
there may be a good deal to do before it is reduced to actual 
cash that he is entitled to draw out or turn over to others, 
though while he keeps up his balance he is not troubled 
with the details of exchange or collection. Though we 
have been especially concerned with the course taken in 
collecting checks, it will be appropriate to note here that 
other items received on deposit may be collected through 
the correspondence department, such as sight drafts and 
coupons payable out of town. 

If a " foreign " check proves not to be " good " when 
it reaches the bank upon which it is drawn, that fact is duly 
certified by a notary in solemn " protest." Then it is 



82 THE MODERN BANK 

returned with the certificate of protest, formally signed and 
sealed, to the bank from which it came and by it to the 
depositor, who is charged with the amount of the check 
and the protest-fees and postage, and any other costs that 
may have been incurred. 

This business of collection involves the use of various 
forms of letters of transmission and advice and of 
acknowledgment, and copies of all of them are kept. 
Where duplicates are not made by the carbon process, 
press copies are made, and even in printed forms a kind 
of ink is used that will give the desired impression. 
An improved press-copying machine is in use by some banks 
with which the paper is in a continuous web, or roll, and one 
letter after another is copied by turning a crank and is 
wound up on a reel, from which they are afterward un- 
wound by a reverse movement and cut off one by one by 
means of an attachment for the purpose, to be filed away. 
Many letters have to be written besides those for which there 
are regular forms, and all these go through the process of 
copying and filing for future reference. On the other 
hand, all letters received in the course of business are 
arranged and filed for ready reference in case of need, to 
verify or rectify anything that may require it. 

The methods that have been described for a New York 
bank apply wherever there is a large business in collection, 
but there are many variations of detail in actual practise. 
Between smaller places there is a less elaborate system, and 
the banks keep book-accounts with each other and make 
periodical settlements. Their payments are usually made 
by bank-drafts or cashier's checks upon some bank in a 
reserve city, or perhaps in New York, where they have 
funds to their credit. Such drafts are always acceptable, 
as they are in demand for exchange upon the cities where 
they are payable. Collections to be made in New York 
or any reserve city are almost always covered by exchange 



COLLECTING OUT-OF-TOWN CHECKS 83 

upon those cities. To make the meaning of this more 
plain, we will assume that a bank in Boston or in a West- 
ern city receives many checks upon New York banks, and 
has many demands for drafts for making payments in 
New 7 York. It sends the checks for deposit in a New York 
bank where it keeps an account and it draws upon its 
deposit there by its own cashier's check for remittance to 
other banks. This it does w 7 hether the remittances are to 
be made to New York or elsewhere, for checks upon New 
York are everywhere in request, as they can be used to 
establish credits in that city to make drafts upon. 

This business of receiving and collecting all sorts of 
checks from all sorts of places has become an onerous part 
of the service of a bank, and is practically in the stage of 
the old method of collecting all checks instead of exchang- 
ing them through clearing-houses, with the added neces- 
sity of using the mails extensively in accomplishing the 
work. There has been some agitation for a better system 
for making collections outside of the cities from which 
they are sent, analogous to that devised for making city 
exchanges through the Clearing-House. A tentative plan 
has been adopted by which one bank in Long Island City 
makes all the collections for New York city banks over 
Long Island. The items are sent to it and it distributes 
them and receives the remittances, accounting to the banks 
from which the items come. In Boston a branch of the 
Clearing-House called the " foreign department " has been 
established for collections throughout New England. It 
is similar in principle to the old Suffolk bank system for 
exchanging and redeeming bank-notes. All items are sent 
to this agency from the banks and there thev are credited 
to the several banks sending them in, classified, recorded, 
and transmitted to the various banks from which col- 
lections are to be made, and from them the remittances 
are received the next day or within a day or two, accord- 
7 



84 THE MODERN BANK 

ing to the time required for the mail service. These are 
charged to the banks to which they are due and turned 
over to them. The business is thus concentrated and sim- 
plified and much trouble is saved to the individual banks, 
which pay their several quotas of the expense in propor- 
tion to the volume of their transactions with the " foreign 
department " of the Clearing-House. 



XII 



We have dealt thus far with the taking in of funds 
by the bank in the form of deposits and the methods em- 
ployed for realizing upon those which are not cash, but 
orders upon other banks or upon persons. In this latter 
process we have been compelled to treat incidentally of a 
considerable part of the payments of the bank at the same 
time, for in exchanging checks through the Clearing-House 
it is in reality paying those drawn upon itself as well as 
collecting those drawn upon the other banks. While only 
balances are settled, what is really effected by the exchange 
is payment and receipt on a vast volume of orders passing 
between the banks. It is no less payment and receipt 
because it is accomplished by transfers of credit, for 
this credit represents actual values in some form outside 
of the banks, and these values in property, commodities, 
etc., are what is in reality transferred and exchanged. If 
we could follow a strictly logical order the next step after 
describing the receipt of funds by the bank in deposits 
would be to account for the use of these funds while in the 
keeping of the bank. Making use of them is in fact its 
principal business, the object of taking deposits, and the 
main source of profit. What it chiefly does is to lend out 
funds deposited with it and credited to its depositors. But 
the functions of a bank in carrying on its business of ob- 
taining funds, loaning them, and repaying, work simul- 
taneously and become so intermingled and interlaced in 

85 



86 THE MODERN BANK 

their operation that it is impossible to follow them in 
strictly logical order. 

As we have accounted for a considerable part of the 
process of paying back to depositors, or paying to their 
order on checks, when describing the exchange and balanc- 
ing off of these orders, it will be simpler now to account 
for the rest in the actual cash payments of the paying 
teller. The receiving teller's department was not taken 
up first because it is the most important. The position 
of the paying teller is regarded as the most important 
and responsible under that of the cashier. He has imme- 
diate charge of the cash of the bank. It goes out through 
his hands, and there is more risk involved in its going out 
than in its coming in. Next to the officers the paying teller 
ranks first among the employees, receives the highest 
salary, and is placed under the heaviest bonds. His chief 
occupation during banking hours is paying out money on 
the checks of depositors. 

Checks are drawn nowadays for making all kinds of 
payments, large and small. Among business men they are 
mostly indorsed and deposited by those receiving them 
in their own bank, which may be the same one upon which 
they are drawn or some other. What effect they have 
then and what becomes of them we have already seen. 
But they may be presented for payment in money, and 
primarily that is what they are for. A check may be made 
payable to bearer, and in that case the person presenting 
it is entitled to payment without identification or indorse- 
ment, and if the signature is genuine the bank assumes 
no risk in paying it, though it prefers to have the name 
of the payee on the back. If a check is drawn payable to 
the order of So-and-so or to him " or order," it must be 
indorsed with his name by himself or by somebody known 
to be authorized to sign for him. In case of a partnership 
it is understood by whom checks are to be either drawn 



THE PAYING TELLER AND THE BANK'S CASH 87 

or indorsed. With corporations it is the usual practise 
for the treasurer to sign and indorse checks with the 
corporate name, followed by his own signature as treas- 
urer. 

As we have said, the paying teller has immediate 
charge of all the cash of the bank. That which is taken in 
by the receiving teller and note-teller or comes in at the cor- 
respondence department is turned over to him with proper 
vouchers during or after banking hours. Whatever is to 
be used in the current business of the day and not kept in 
the vaults for other purposes or as a reserve is in his im- 
mediate control for making cash payments. In the morn- 
ing he has a slip upon which is entered all the bank's cash 
duly classified as gold coin, gold treasury certificates, gold 
Clearing-House certificates, Sub-Treasury receipts, silver 
coin, silver Treasury certificates, silver Treasury notes, 
legal-tender notes, national bank-notes, etc., with the 
amounts set against each entry and all footed up. Sepa- 
rately there is a statement of the three items of the " re- 
serve chest " — legal-tender notes, Treasury gold certificates, 
and Clearing-House gold certificates, showing just how 
the reserve stands. This shows the condition of the bank 
in the matter of cash at the beginning of business on this 
day. 

In his drawer, or conveniently at hand, the teller 
has the amount of money that he expects to have occasion 
to use during the day, though he may draw from the re- 
ceiving teller in case of need. This is distributed in sepa- 
rate tills by denominations and kinds of money and in pack- 
ages of various sums in the manner that experience has 
shown to be most convenient for expeditious payment. For 
" making change " an ingenious machine has been in- 
vented and is more or less used, called the " automatic 
cashier." All the fractional coins are arranged in the 
interior of the mechanism in such a way that by pressing 



88 



THE MODERN BANK 



a key corresponding to the exact fraction of a dollar that 
he requires the teller brings out that precise sum in coin 
and can safely hand it over without counting. The ma- 
chine can make no mistakes. It is a common practise with 
banks to make up sums that may be required by a customer 
for a special purpose, such as providing for a pay-roll, in 
the denominations desired, if notice is received beforehand. 
A bank with many women depositors will keep on hand a 
supply of new bills for making payments to them, as ladies 
are apt to be fond of receiving " clean money." Other 
customers may be accommodated in a similar way, if they 
express the wish, for it is the policy of a well-managed bank 
to be always obliging. At the hour of opening, which is 
usually ten o'clock in the forenoon, the paying teller is 
prepared to pay any checks drawn upon his bank. 

He keeps himself as familiar as possible with the state 
of the different accounts, but will rely upon his confidence 
in well-known customers of high standing. When in 
doubt, he will ascertain the condition of the account from 
the balance-ledger, which is always accessible to him. He 
is familiar with the appearance of most of the customers 
who present their own checks, and that of many others 
who are accustomed to present checks on the bank, and 
with their indorsements. He is able to recognize most of 
the signatures, but has one of the signature-books at hand 
to verify them in case of doubt. When a stranger pre- 
sents a check, identification is required even though there 
is no doubt about the signature or indorsement. A check 
may have passed through several hands and it is desirable 
to know to whom it is paid. If the person presenting the 
check is not the original payee, his indorsement is required 
as well as personal identification. In these matters the 
paying teller is particular, and has to look out for forgeries 
or changes in the amount of the check, for when payment 
is once made recovery is difficult, and the bank and not 



FIRST TELLER. 
CASH. 

THE NEWARK NATIONAL BANK. 



&J4 


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90 THE MODERN BANK 

the depositor will be the loser, unless the latter is a par- 
ticipant in fraud. 

Frequently a check will be presented not for payment 
but for certification or acceptance, which is made acro^ 
the face in writing or with a stamp, usually with the 
words " accepted " or " good when properly indorsed/' 
the date, and name of the teller. A record is kept of all 
certified or accepted checks, for the amount is at once 
debited to the depositor, and his balance that can be further 
drawn upon is reduced by that much. These checks are 
entitled to payment in preference to those of later date. 
National banks are forbidden by law to certify for a larger 
amount than stands to the credit of the drawer, but in 
practise the rule is somewhat relaxed in favor of good 
and trustworthy customers, and the excess is treated as 
a temporary loan. Outstanding certified checks figure 
among the bank's liabilities. If a check is presented for a 
larger amount than the drawer has to his credit, payment 
is refused, but exceptions are also made to that and " over- 
drafts " are sometimes allowed to good customers, but a 
record is made of them and notice sent to the drawers to 
make their balance good. Overdrafts are items in the 
bank's " assets," as they represent sums due to it. 

It is hardly necessary to say that a good paying teller 
is quick at figures, an expert in handwriting, and an adept 
at counting money, for in a busy bank he works with great 
rapidity at times, and it is important that he should be 
accurate and sure. He will be as ready as the receiving 
teller to detect " bad money " in case it should come into 
his hands or any question should be raised by the person 
for whom a check is cashed. If a check upon some other 
bank is offered, there is no obligation to pay it, but if the 
person offering it is known it may be done as an accom- 
modation, and banks usually make a point of being ac- 
commodating. But such a check must be turned over to 



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THE PAYING TELLER AND THE BANK'S CASH 91 

the receiving teller or note-teller to be exchanged or col- 
lected. If drawn on a clearing-house bank it will take its 
course through the " exchanges " and be charged to the 
bank upon which it is drawn. If it is on a bank that does 
not " clear/' or is out of town, it takes its course to the 
departments that deal with such for collection. If it is 
an out-of-town check, the regular exchange charge will be 
made to the person for whom the check is cashed. Such 
checks appear as items in the proof of the teller to whom 
they are turned over. 

The paying teller has before him a book upon which 
he enters the amount of each check as it is paid, w 7 ith the 
initials of the drawer, just as the receiving teller enters 
his receipts. He also makes up a " proof " after banking- 
hours to test the correctness of his work, and this is entered 
in the " first teller's proof-book." Payments may have 
been made upon cashier's orders or in cashing checks of 
other banks, as w r ell as those upon his own bank, and ad- 
ditions may have been made to the morning's cash by 
transfers from the receiving teller. In the proof -book are 
entered the aggregate of payments made under different 
heads, and this must agree with the footing of the vouchers 
representing them, in order to " prove." Among the pay- 
ments made during the day may be a balance due at the 
Clearing-House and the paying teller makes that up as 
soon as he receives notice of the " debit balance " and its 
amount. On the other hand, there may be a " credit 
balance " which comes from the Clearing-House to be added 
to the paying teller's cash. 

In some banks a " Teller's Settlement-Book " is kept, 
of which a page is devoted to each day's work. This 
shows the balance at the beginning of the day, the 
several amounts received from different sources, as sec- 
ond teller, third teller, Clearing-House credit balance, if 
any; and the sums paid out on checks, Clearing-House 



92 THE MODERN BANK 

debit balance, if any, etc., and the balance remaining, 
spread out in a description of the different kinds of 
money and the amount of each. Finally, as the teller be- 
gan the day with a schedule of the money on hand belong- 
ing to the bank, he ends it with another of the same kind. 
This not only classifies the cash as gold coin, certificates, 
legal-tenders, bank-notes, etc., but gives the amount of 
each denomination of the certificates and notes, except 
those of national banks. This shows at a glance the state 
of the bank's cash as it is gathered into the vault at night 
and furnishes the means of comparison with what it was 
in the morning. With most large national banks a sepa- 
rate statement is appended of the items of the " reserve- 
chest/' as this can only include " lawful money/' and it is 
desirable to have it stated apart, so that its relation to 
deposits may be readily noted. The aggregate of the de- 
posits can be ascertained each night from the general book- 
keeper, and the relation of the reserve to it is a matter of 
importance. State banks do not make this separate state- 
ment of reserve items in their cash schedule, because they 
include national bank-notes in their reserves. 



XIII 

HOW PAID CHECKS ARE DISPOSED OF 

When the customer of a bank takes in payment a check 
drawn upon another bank and deposits it in his own, the 
latter credits him with the amount and proceeds to col- 
lect it from the other bank. Whether this is done by send- 
ing it directly to the other bank by messenger, by exchang- 
ing it through the Clearing-House, or by sending it out of 
town through the correspondence department, it is in sub- 
stance simply collecting this payment for the customer. 
When the depositor makes a payment by drawing a check 
upon his own bank and giving or sending it to the person 
to whom payment is to be made, the bank has to see that 
the payment is actually effected out of his deposit, and 
duly charged to his account. In fact, it has actually to 
pay the check which is simply an order upon it to pay. If 
it is presented at the paying teller's window, it is a simple 
matter, and the checks received and cashed there are im- 
mediately charged against the depositor's account. If it 
is received in a deposit at the receiving teller's window, it 
is equally simple. The amount is transferred between the 
account of the drawer and that of the payee depositing it, 
by being charged to the former and credited to the latter. 
The debits are entered from the checks in the first place — 
just as the credits are entered from the deposit-slips. 
When the bank gets its checks back from the process of 
exchanging through the Clearing-House it is equally a mat- 
ter of paying the checks. They have been paid with checks 

93 



94 THE MODERN BANK 

of the various banks in which they have been deposited, 
and by the settlement of the balance at the clearing-house. 
The bank has made all the payments for its customers and 
has now to make the charges to them. 

To a clear understanding of this it is necessary to make 
a preliminary explanation of the balance-ledger, though 
that properly belongs to the bookkeeping department, to 
be considered more fully hereafter. In a large bank the 
ledgers are divided into several volumes designated by 
the initials of the first and last name contained in them, 
as the " A-F ledger/' the " G-L ledger," and so on. 
In the balance-ledger the names of depositors are arranged 
alphabetically on the left-hand margin of the left-hand 
page, and across two broad pages runs a series of narrow 
double columns for debits and credits, so that successive 
dates may be included upon the two leaves as the book lies 
open. The purpose of this book is simply to keep up the 
balance of every depositor as promptly and closely as pos- 
sible, so that it can be readily ascertained. In the first 
half of the double column for the day any debit of that 
day is entered opposite the name to which it is to be 
charged, and in the other half is entered any credit that 
may belong to that day, together with the balance. 
Deposits are entered as credits directly from the slips. 
Payments of the bank for the depositor are entered as 
debits from the returned checks, and the balance is kept 
up each day, being usually entered in the morning in 
advance of new debit and credit items. Where there are 
many " inactive " accounts, in which entries are made at 
irregular and comparatively long intervals, they are in- 
cluded by themselves in a separate set of pages in the 
ledgers, and are sometimes designated as " sundries." 

In a large and active city bank by far the largest 
volume of its checks come through the Clearing-House in 
the envelopes that were sent in by the other banks. There 



HOW PAID CHECKS ARE DISPOSED OF 95 

may be thousands of them, representing the payment of 
millions of dollars by a single bank in one day. As soon as 
these are brought in from the morning's clearing they are 
taken in charge by the " exchange-teller/' or a check-clerk, 
who has a force of assistants. The first thing to be done is 
to see if the returns from the other banks are correctly 
made, and the checks are not separated from the several 
envelopes in which they come until they have been com- 
pared and " ticked off " on the accompanying list and the 
several amounts are ascertained to be correctly stated. If 
not correct, the checks with which errors have been made 
are laid aside for the purpose of making or allowing re- 
clamations. The banks have until three o'clock to adjust 
such errors. All the checks are then assorted and divided 
according to the division of the ledger and books of entry, 
and are arranged in alphabetical order for each. They are 
examined one after another by different clerks as to date 
and " filling " — that is, to see that the date is not later than 
the time of payment and that the amounts as written and 
as given in figures correspond. Any possibility of the 
amount having been " raised " is also looked out for. As 
fast as this is done they are entered in books with names 
and amounts in their proper order, the books correspond- 
ing to the volumes of the ledgers. This is for " proving/' 
which is done by listing the checks of each page of the 
book on the adding-machine and seeing that the totals agree 
with the returns from the banks. The books also serve as 
a record of the exchanges. 

When this is done, or while it is going on, the checks 
are taken by the balance-bookkeepers to charge as debits 
in their ledgers, and it is part of their duty to see that 
they are " good " — that is, that none is an overdraft of 
the balance. They have already entered the " home 
checks," or those paid or deposited in the bank itself, 
and the necessary examination of these has been made 



96 THE MODERN BANK 

by the tellers through whose hands they have passed. 
All checks are run over by a " stop-clerk/' to see if pay- 
ment has been stopped upon any of them. He keeps a list 
of checks on which the bank has received notice to stop 
payment, and goes through the entire lot each day to find 
any to which this applies. There is an examination of 
signatures as a safeguard against fraud or forgery. A 
competent body of check-clerks will become so expert that 
they can pass upon the great mass of checks with rapidity 
and certainty. They are not only familiar with the sig- 
natures of most of the depositors, but with those of many 
of the indorsers. It is the business of the banks taking 
the checks on deposit to look out for the latter, but if the 
amount drawn is large or there seems to be any irregular- 
ity in the indorsement, trouble may be saved by an exer- 
cise of caution. Anything that excites suspicion will be 
subject to keen scrutiny. In spite of every precaution an 
untrustworthy customer may be taken, and the forgery 
of names is a crime that the utmost vigilance has not 
wholly eliminated. There is a practise known as " kiting 
checks " that has to be looked out for in handling the " ex- 
changes." A customer not known to be wholly trust- 
worthy, or a new depositor, may deposit a large check. 
The check may prove not to be good, but before it comes 
back from the bank upon which it is drawn the customer 
may have taken advantage of the credit to draw on his 
own account and get the cash. Where there is suspicion 
of anything of the kind, payment will be delayed, if pos- 
sible, and a sharp watch kept for the deposited check. The 
telephone is serviceable in interfering with this kind of 
kite-flying. 

After checks have gone through the process of exami- 
nation, recording, proving, and posting, they are ready to 
be sorted to the names of the depositors and filed away to 
be returned to them. Those that have been laid aside for 



HOW PAID CHECKS ARE DISPOSED OF 97 

any error or irregularity are submitted to the cashier or 
his assistant, or to some officer or clerk authorized to de- 
cide whether they shall be taken without correction. If 
any bank has made an error in its return, or if a check is 
postdated or not good, all those so affected are sent back 
and reclamations made for the amount, to be credited in 
the exchanges of the next day, but the claim must be made 
before three o'clock to secure the correction. An over- 
draft may be allowed to pass and the depositor notified to 
make his account good at once. In the case of a stopped 
check, it is simply not paid and is returned to the drawer. 
If when the notice comes it has already been paid, noth- 
ing can be done unless it has come through the exchanges 
on the same day the notice is received in time to be re- 
turned to the bank in which it was deposited as " not 
good." 

After the entries have all been made and all ir- 
regularities have been cleared up, the paid checks are 
finally brought together, and the check-clerks sort them 
to the different depositors' names, cancel those which have 
come through the Clearing-House by cutting, and stamp 
each on the face with a stamp bearing the name of the 
bank and the date, as final evidence of payment. Those 
that were received by the paying teller, receiving teller, and 
note-teller have already been canceled by them by putting 
upon a spindle or file, and each has a different cut, so that 
every check bears the evidence of the mode of payment. The 
books in which the checks have been entered, those from 
the Clearing-House and those taken by the several tellers, 
are used by the " deposit " bookkeepers in making the 
postings in their ledgers of individual accounts, though 
usually the " home checks," or those paid in the bank 
itself, are posted directly. Those taken by the second and 
third tellers have to be credited to those depositing or mak- 
ing payments with them, as well as charged to those who 



98 THE MODERN BANK 

drew them. It is the next morning when all are finally 
sorted away as paid and become " vouchers " for the pay- 
ments. 

They are then placed in drawers, those of each depos- 
itor having back of them a card or strip of pasteboard with 
his name on the edge, which for part of its length projects 
above the checks so that the name can be readily seen. 
These are arranged alphabetically, and additional checks 
can be easily inserted from day to day until such time as 
the pass-book may come in to be balanced. When that 
happens, the book goes first to the check-clerk, who takes 
out the paid checks and other vouchers and enters the 
amount of each on the credit-page. If there is a large 
number, the checks may be listed on the adding-machine 
and only the footing entered in the book, the list being 
returned with the canceled checks. The charge-tickets 
for any other debits to the depositor, which are credits to 
the bank, representing charges for " exchange " in collect- 
ing out-of-town items or any payments of the bank on the 
depositor's account, have been filed away with the checks 
and are included with them as vouchers. Thus prepared, 
the pass-book goes to the bookkeeper in charge of the " in- 
dividual ledger " to be verified and " proved " by compari- 
son with his entries. The balance being struck, the book 
is ready to be called for by the depositor, who receipts 
with his signature or initials, on the page where the bal- 
ance is stated, for the number and amount of the vouchers 
returned. 

In some banks, instead of making separate entries 
of the paid checks and charge-tickets in the pass-book 
or listing them when the book is balanced, a voucher- 
list is kept upon which the entries are made when the 
checks or tickets are charged up. This is complete when 
the pass-book is balanced and is footed up, and accompanies 
the book when the total has been entered. In a few large 







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Face and Back of Paid and Canceled Check. 



LofC. 



100 THE MODERN BANK 

banks the practise has been adopted of having an " in- 
formation-clerk " as an intermediary between the depos- 
itors and the clerks and bookkeepers who deal directly 
with their accounts. He has a desk, and a window open 
to the public, and it is his business to answer general ques- 
tions and give information, but his particular charge is 
the pass-books when left to be balanced. He receives 
them, looks up the checks, and sees to the verification by 
the bookkeepers. If there are any inquiries or any errors 
to be corrected, he attends to these details and has charge 
of the books until they are called for. One object is to 
relieve the check-clerks and bookkeepers of this particular 
work and to concentrate responsibility for it. Inciden- 
tally it is a precaution against any possible collusion be- 
tween a depositor and those having charge of his account. 
When the checks have been returned to those who drew 
them, they have final evidence that the payments these 
represent have been made by the bank. 



XIV 

COLLECTION DEPARTMENT 

There is in most large banks a separate department 
for making collections for customers upon other items 
than those payable on demand. The latter have been al- 
ready explained as made at once through the note-teller 
in the city and through the corresponding clerk out of 
town. But if a customer has a time-draft or a note to be 
collected, instead of attending to the matter himself, he 
may leave the " item " with the collection-clerk of his bank 
any time before maturity and have it attended to for him. 
If he has much of this kind of collection to be done he 
may have a special pass-book for it, but ordinarily the 
clerk will enter the items in the back part of his deposit 
pass-book. Then he will make a careful record in a col- 
lection register. Where there is much of this kind of 
business he will keep two registers, one for city and one 
for " foreign " or out-of-town collections. The items are 
consecutively numbered in the books and entries are made 
in the City Collections Eegister of the date upon which 
the items are left, the name of the signer of a note or the 
person upon whom a draft is drawn, the date when payable, 
the name of the person for whom the collection is made, 
and the amount. There is also a column for noting the 
result, as " paid and credited," " returned unpaid," etc. 
In the Foreign Collections Eegister besides these there 
are entries of the place where payable and the correspond- 
ents to whom the items are sent. The clerk also keeps a 

101 



102 THE MODERN BANK 

book called a " tickler/' which has a page for each day, and 
the items are entered in this under the date on which they 
become payable, so that by looking ahead he can always 
tell what notes and drafts are maturing day by day. The 
notes and drafts themselves are kept in a large wallet ar- 
ranged in the order of maturing. 

On the day before any city item becomes due, or on 
the morning of that day, it is turned over to the note-teller 
and he includes it with those sent out by messenger 
for collection. He receives the payment as in the 
case of demand items, and accounts for it in the same 
way, adding it to his credits to customers for that day. 
Then it is credited for the first time on the ledgers to the 
person for whom it is collected. If it is a " foreign item," 
it is turned over to the corresponding clerk long enough 
before the due date to have it sent to a correspondent for 
collection in proper time. Collections are made by the 
correspondent, and the manner of remitting and crediting 
is substantially the same as in the case of checks. Foreign 
demand drafts are sent to correspondents in the same 
manner. The remittances come to the mail-teller, or, 
where there is none, to the corresponding clerk, to be turned 
over to the note-teller, and then the proper " credits " and 
" charges " are made upon the books. 

Sometimes sight drafts or checks are placed in the 
hands of the collection-clerk, instead of going directly to 
the note-teller or corresponding clerk, but only when col- 
lection is to be made under some special instruction, or 
in some exceptional way outside of the ordinary routine. 
The collection department is in a way supplementary or 
subsidiary to those of the note-teller and corresponding 
clerk, and covers cases requiring time or special methods 
to secure payment. 

In some banks an important part of the work of this 
department is collecting coupons left for the purpose be- 



COLLECTION DEPARTMENT 103 

fore they have matured for payment. In others this is 
attended to by a separate coupon-clerk, but in either case 
a systematic record is kept of the coupons, with the names 
of those to whom they belong, the bonds from which they 
have been detached, the amounts, the persons, corpora- 
tions, or officers from whom, and the places at which the 
collections are to be made, and the dates of maturity. 
There may be a large accumulation of these, adding mate- 
rially to deposits when they are collected. It is no uncom- 
mon thing for persons going away for a long absence to 
leave their coupons at the bank for months ahead, to be 
collected and credited as they mature. The collection is 
made through the note-teller, or " city office," or through 
the correspondence department, according as they may be 
payable in town or elsewhere, and the proceeds pass finally 
through the note-teller's account in all cases. It is his busi- 
ness to account for all cash receipts that do not come to the 
receiving teller. 



XV 

DRAFTS AND DOMESTIC EXCHANGE 

Personal drafts differ from checks in being drawn by 
one person upon another and not upon a bank. A draft 
may be an order of one person upon another to pay a third, 
or it may be an order to pay the drawer himself. It may 
be payable " at sight/' which means as soon as it is pre- 
sented, or it may be payable after a specified number of 
days or upon a particular date. In the latter case it is 
usually presented for " acceptance/' and this is indicated 
by the person upon whom it is drawn writing across its 
face the word " Accepted/' with date and signature. It is 
then commonly called an " acceptance." A person receiv- 
ing a draft drawn upon another may present it himself, 
but nowadays it is usual to leave it with a bank for col- 
lection. If it is & sight draft it may be indorsed and de- 
posited like a check, as we have already seen, and if it is 
made payable at a bank it may go through the exchanges 
like a check after being certified as accepted by the bank. 
Otherwise, it will be collected " by hand." If it is a " time- 
draft/' it will be left for collection, presented at once for 
acceptance by the bank's messenger, and then kept to be 
collected at maturity. 

Business men in different places having dealings with 
each other make considerable use of this form of draft. 
For instance, a merchant in one city may buy and sell in 
the same place some distance away and therefore have 
occasion both to make payments there and to collect pay- 
104 



106 THE MODERN BANK 

ments due him. Instead of sending money or a check to a 
person whom he owes and having the person who owes 
him remit in the same way, he will draw a draft upon 
his debtor, ordering him to pay a specified sum to his 
creditor, and will send this to the latter, who may collect 
the amount or have it done by his bank. The same method 
may be used at the other end of the line and between 
different places in all directions. The result, where there 
are many accounts running, will be continual payments 
by transfers between debtors and creditors in the same 
place, instead of by sending money or checks back and 
forth between different places. These accounts are not 
likely to balance between persons or between places, and 
there will be balances to settle by checks or by remittances 
of money from time to time. Both in making the trans- 
fers and the remittances banks play the leading part. 
Drafts when paid through banks come back to the drawers 
like checks. 

Another form of draft largely used is drawn payable 
to the order of the person who draws it. Many large 
transactions are effected by the use of such drafts. To 
illustrate, we will suppose that a merchant in New York 
or Boston is sending goods to a dealer in Chicago, or any 
other distant place. He consigns the goods to his customer 
and has a bill of lading made out when they are shipped. 
He draws upon his customer for the amount of the bill, 
attaches the draft to the bill of lading, and takes it to his 
bank. The bank may advance the amount, giving him 
credit for it at once and make collection for itself, or more 
commonly it will take it for collection and credit him 
with the proceeds and charge him for " exchange " after 
the collection is made. The bill of lading gives the bank 
title to the goods until they are paid for. It sends the draft 
with the bill attached to a bank in the place where the 
goods are to be delivered and that bank attends to the 



DRAFTS AND DOMESTIC EXCHANGE 107 

collection. It presents the draft for payment, and does 
not surrender the bill of lading so as to permit the con- 
signee to get the merchandise, until the draft is paid. Then 
it credits the amount to the Eastern bank, and in the course 
of subsequent exchange it goes back to that bank and ulti- 
mately to the drawer, paid and canceled. A time-draft 
may be used in securing payments of this kind, if there is 
an agreement to that effect between the parties. In that 
case it is presented when received by the distant bank for 
" acceptance " and held for collection until its maturity. 
Whether the bill of lading is surrendered on acceptance, 
thereby permitting the delivery of the goods, or held until 
payment, will depend upon instructions. Time-drafts are 
not much used for this purpose, and only those of short 
date, unless the merchandise is to be stored and kept for 
some time. 

The same method is used in collecting payment in the 
opposite direction. We will suppose, for instance, that 
a man is engaged in shipping grain from Minneapolis or 
Duluth to Chicago, and it is to be despatched thence, part 
to New York, part to Boston, and part to Philadelphia or 
Baltimore, some for the home market and some for export. 
He sends a cargo or a train-load to the dealer in Chicago 
and draws upon him for payment, turning the draft and 
bill of lading over to his bank, which sends it to a bank in 
Chicago for collection. Thence the bulk of grain may be 
divided, and part retained in the city by the lake and part 
sent in different directions to various consignees upon 
whom drafts will be drawn. These, with separate bills of 
lading attached, will be placed with a Chicago bank to be 
forwarded along the different lines to banks at the points 
of destination, and they will see to their collection from 
the several consignees before the bills of lading are given 
up and the grain is delivered. Parts of this cargo or train- 
load may be " billed through " to the Eastern destination 






108 THE MODERN BANK 



instead of going through any transfer at Chicago. In that 
case the drafts and bills of lading pertaining to those parts 
will be sent direct from the bank at the starting-point to 
that in the Eastern city to which the grain is destined. 

Assuming now that a draft has reached New York with 
a bill of lading attached for certain car-loads of grain, the 
bank receiving it will present it for payment and when it 
is paid will give up the bill of lading and credit the Western 
bank with the amount collected, which that bank has al- 
ready paid to its own customer. Charges for collection, 
or " exchange/' will be duly made by the banks concerned 
in the transaction, and these will be met by the recipient 
of the money collected. 

Supposing this grain or a part of it is for export, there 
will be another banking operation in drawing a foreign 
bill of exchange upon the consignee abroad and attaching 
a new bill of lading to that, which bill of exchange will be 
sold to a bank or banking-house. This kind of business 
is attended to mostly by private banking concerns having 
foreign connections, which will be the subject of a separate 
chapter later on, but it has come to be more or less a prac- 
tise to ship grain from Chicago or even farther West, 
intended for export, on " through bills of lading " to a 
foreign consignee. In that case the intermediate collec- 
tions of those concerned in the operation are made on 
domestic drafts, and the foreign bills of exchange are 
drawn at the port of shipment, the same bill of lading 
accompanying the successive drafts and the final bills of 
exchange. The through bill of lading chiefly concerns the 
business of transportation, and through freight-rates are 
made, apportioned by agreement between railroad and 
steamship lines. The principle and method are essentially 
the same if the shipment is of cattle or provisions from 
the West, or of cotton or tobacco from the South, or of 
any of the products of the interior to places on the borders 






DRAFTS AND DOMESTIC EXCHANGE 109 

of the land. It is in this large traffic that drafts of the 
kind described are mostly used, and it is an important 
service of banks to facilitate this sort of interchange. 

Some of the products consigned to central points of 
distribution, East, West, or South, whether intended for 
the domestic market or for export, may not be sold or 
shipped at once. In that case they are usually stored in 
warehouses and negotiable receipts are given for them. 
On the security of these, which may transfer title to the 
goods by appropriate indorsement, money may be bor- 
rowed from banks. This is a matter that belongs to the 
subject of loans, to be considered in another chapter, but 
it is proper to mention here that it is no uncommon thing 
to make arrangement with the bank for borrowing money 
on the warehouse-receipts to pay the drafts and obtain 
the bills of lading that represent the original purchase of 
the merchandise. 

There are other forms of making payments and col- 
lections between distant places in which banks play an 
important part. Traders in different cities may keep 
running accounts with each other and make periodical 
settlements. If one wishes to send a considerable sum, 
we will say from Chicago to New York, he may buy from 
his bank what is sometimes called a " bank-draft," but 
what is usually in effect a check of that bank drawn upon 
a bank in New York with which it keeps an account. The 
Chicago bank very likely has checks and drafts drawn upon 
New York which have been deposited with it or left for 
collection, and it sends these on for deposit to cover the 
draft it has sold to its customer. This is known as selling 
New Yo*rk exchange. Of course a corresponding trans- 
action may take place in New York, a bank selling its 
draft, or check, on Chicago and sending Chicago checks 
and drafts that it has received from customers to cover it. 
The same proceeding is going on between all manner of 



110 



THE MODERN BANK 



places, but drafts upon New York banks or those of some 
other financial center are much used in making remittances 
between smaller places because these are always in de- 
mand. New York exchange especially is used all over 
the country, because that is the chief distributing point, 
and a great volume of payments is being made to it and 
from it all the time. To a less extent and for greater or 
larger sections of the country this is true of other cities, 
but there is a convergence of financial lines upon New 
York from the other leading centers and from many sub- 
ordinate points, either direct or through these other cen- 
ters. If the network were visible it would appear like an 
intricately tangled web, but payments and receipts are 
running smoothly over its lines all the time, though there 
may be occasional hitches and breaks. 

There are still other ways of transmitting funds and 
transferring credits by the instrumentality of banks. Sup- 
pose a man in New York wishes to make a direct payment 
of cash to a man in Chicago. He need not send it by mail 
or express, but pay it in at his own bank and obtain a 
" letter of advice," addressed by that bank to a bank in 
Chicago directing it to pay the money on presentation of 
the letter. The New York man sends this " letter of ad- 
vice " to his friend or creditor in the distant citv, and he 
can go to the bank to which it is directed and obtain the 
money, the two banks settling between themselves. The 
small charge for this service is an insurance against loss 
of the money in transit and saves the expense of trans- 
mittal. No money passes between the banks on that par- 
ticular transaction, but only a transfer of credits, the bank 
making the payment charging it to the bank that received 
the money, and the latter crediting it to the former. 

Instead of a letter of advice, a certificate of deposit 
may be used for a transfer of cash to a distant point. These 
instruments will be dealt with farther on, but as they enter 




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112 THE MODERN BANK 

into domestic exchange it may simply be stated here that 
by depositing a certain sum in a bank a person may obtain 
a certificate of that fact which will direct its payment to 
another person. The other person, if at a distance, will 
have no difficulty in getting the certificate cashed, or the 
amount credited to him by a bank in the place where he is. 
Letters of credit, which will also be spoken of hereafter, 
are obtained by paying money to a bank in one place and 
used in getting the money from banks or bankers in other 
places. All these things are referred to here as entering 
into the operations known collectively as " domestic ex- 
change." 

In domestic exchange is involved those payments and 
collections within the country which are effected between, 
places at a greater or less distance from each other by 
transfers of credits and debits and the offsetting of ac- 
counts payable and accounts receivable through the agency 
of banks. There can never be an exact balancing and off- 
setting of these accounts, but there must be a frequent 
settling of balances in cash, and money must be sent back 
and forth to a greater or less extent. It is an important 
function of banking to reduce this necessity as much as 
possible by extending the utility of credit as a means for 
effecting exchange to the utmost limit, for in the use of 
credit in place of money there is great economy. 

Out of the varying inequality between credit and debit 
accounts and the necessity of settling balances arise what 
is known as " rates of exchange." At Chicago or New 
Orleans exchange upon New York may be at par at one 
time, at a premium at another time, and at a discount at 
yet another. This applies at any centers of business be- 
tween which exchange operations go on. Smaller places 
make their settlements in or through the larger ones, and 
the main transactions go on between a few leading cities, 
with converging lines on New York, because its banking 



DRAFTS AND DOMESTIC EXCHANGE 113 

operations considerably exceed in volume those of all the 
rest of the country and are intimately connected with 
them. We can best understand this matter of fluctuating 
rates of exchange and the actual movement of money in 
settling balances by taking up concrete instances. 

It will be understood from what has been already said 
that credits are being all the time created in banks in one 
city on account of banks in other cities and are being con- 
tinually drawn upon. Suppose now that importers and 
jobbers in Xew York are sending out large amounts of 
merchandise in foreign and domestic manufactured goods 
for distribution in the West and South. They are draw- 
ing heavily upon Chicago, Cincinnati, St. Louis, Xew 
Orleans, and other distributing points for payment, hav- 
ing their own drafts collected or receiving checks and drafts 
from their customers and piling up credits in the New York 
banks at the expense of those in the other places. For the 
sake of simplicity we will concentrate attention upon 
Chicago. When the balance of traffic is strongly westward 
and the larger amount of payments is made in Xew York, 
there will be an accumulation of local credits there and a 
depletion of those of the Chicago banks. A man in New 
York who at such a time has payments to make in Chicago 
will have no difficulty in buying the exchange. In fact, 
there will be so much offered by competing banks that it 
will be at a discount, because the supply exceeds the de- 
mand. 

How much " below par" will it go? That depends 
upon how much it will cost to bring actual money from 
Chicago to Xew York to pay off some of the balances 
rolling up against it and reduce the volume of obligations. 
The banks, rather than sell their exchange below the mar- 
gin of that cost, will draw the money from their corre- 
spondents, forcing the Chicago banks to curtail their loans 
and reduce their reserves. At the same time Xew York 



114 THE MODERN BANK 

exchange will be scarce and at a premium in Chicago. 
There will not be enough to cover the remittances required, 
and when the premium goes to the limit of the cost of send- 
ing cash to build up credits to be drawn upon, the cash will 
be sent. Suppose the cost of sending money by express 
from one city to the other to be fifteen cents per thousand 
dollars. Then, when the discount in New York or the 
premium in Chicago reaches that limit, the banks will 
arrange for the transfer of money to the East rather than 
have the rate of exchange go any further. Thus it hap- 
pens that when the value of merchandise going from the 
Atlantic coast to the interior exceeds that of the commodi- 
ties going to markets of the East, there will be a movement 
of currency to New York. 

Now take the reverse case. At the beginning of the 
autumn, when the great crops of grain begin to be sent from 
the West and cotton begins to move from the South, there 
is a call for money from those sections. There are pay- 
ments to be made to harvest-hands and to farmers and for 
expenses of local transportation, and when the products 
begin to be consigned to Eastern dealers heavy drafts are 
made upon New York. Exchange upon that place will 
become plentiful and fall to a discount. As the funds of 
Western banks become depleted and their New York cred- 
its heavy, there will be a transfer of actual currency to the 
interior to meet the accumulated obligations there and 
reduce the balances so as to keep the rate of exchange 
down to the limit of the cost of making this transfer, which 
will be equal to express charges and insurance. The mat- 
ter is arranged between the banks according to the con- 
dition of their accounts with each other and their mutual 
interests, and ordinarily their customers will have nothing 
directly to do with sending the money that affects their 
individual transactions. They will merely buy exchange 
at the ruling rate, as they have occasion, and the rate will 



DRAFTS AND DOMESTIC EXCHANGE 115 

be practically determined by the action of the banks. 
Usually money is sent by express from one bank to another, 
but sometimes it is deposited with the United States Sub- 
Treasury, which will order its payment by the Sub- 
Treasury at the other end of the line by telegraph. The 
advantage of this lies in the promptness and safety of the 
transfer, which can be made immediately. There may be 
occasions when that is important. 

This movement of money eastward at one season and 
westward at another, or from and to " the interior/' is of 
course not a transmission over any single line, but over 
several, and it involves distribution locally over many. Its 
effect upon the money market has become a familiar sub- 
ject of discussion. It appears most conspicuously in New 
York during the " crop-moving season," because there and 
then it is most concentrated. It causes a considerable 
withdrawal of funds which banks in the interior have kept 
on deposit in New York, and which the latter have used 
in the loan market. Western banks sometimes loan funds 
in New York on their own account through their agents 
or brokers, and these are liable to be withdrawn when there 
is use for them at home. The result may be, and usually 
is, a stringency in the New York money market. The re- 
serves are drawn upon and loans have to be called in, with 
the effect of curtailing deposits, and interest rates are ad- 
vanced. The effect is felt not only on the Stock Exchange, 
where much borrowed money is used, but in commercial 
circles as well. It is even extended to foreign exchange 
and the movement of gold, as we shall have occasion to 
note when dealing with that subject. 

This stringency, produced by the interior movement 
of money, may be aggravated by the action of the United 
States Treasury in making its collections and disburse- 
ments, which never closely correspond in volume and time. 
When it is collecting more than it pays out, it draws money 



116 THE MODERN BANK 

on balance from the banks and keeps it out of the channels 
of circulation. This effect is mitigated, when there is a 
large surplus of receipts, by the deposit of public money 
in designated national banks instead of keeping it locked 
up in the Sub-Treasury, but customs receipts can not under 
the present law be so deposited, and banks receiving public 
deposits have to give security for safe-keeping and repay- 
ment by lodging Government bonds with the United States 
Treasury, " and otherwise/' according to the requirements 
of the Secretary of the Treasury. Relief is sometimes 
given to the money market not only by increasing these 
deposits, but by making extra payments in anticipating in- 
terest on Government bonds or buying up some of those 
obligations for the sinking fund. 

A tendency of the increased demand for currency at 
such times is to induce the banks to put out more circu- 
lation, but this does not work promptly or easily, because 
of the necessity of buying Government bonds to secure the 
additional circulation, and the restriction put upon its 
withdrawal when it is once out. Not more than $3,000,- 
000 a month in the aggregate can be retired under the ex- 
isting law, and legal-tender notes have to be deposited with 
the Treasurer to take up the bond security and provide for 
the redemption of the notes. If the banks could issue their 
notes, when more currency was needed, on their credit and 
the security of their own resources, and were made exclu- 
sively responsible for their redemption on demand, they 
could adjust the volume of this part of the national cur- 
rency to the varying requirements of business in different 
periods of the year. The course of domestic, exchange is 
materially affected by the system of regulating bank-note 
circulation. 

The reader will of course understand that in dealing 
with the subject in this concrete way, it is intended to 
illustrate the principle and working of domestic exchange, 



DRAFTS AND DOMESTIC EXCHANGE 117 

and will see for himself the application in the innumer- 
able transactions that are all the time going on not only 
between the principal centers in different sections of the 
country, but between all manner of places having business 
relations with each other. But balances between smaller 
places and within narrower limits are mostly settled by 
exchange, or drafts upon financial centers, and the actual 
transfers of money in considerable amount for final settle- 
ments are made only between these centers. New York is 
the main point upon which the lines converge and from 
which they diverge in the vast network of banking opera- 
tions, though they intersect and spread from numerous 
other points of varying importance. 



XVI 

DISCOUNTS AND COMMERCIAL PAPER 

We come now to the principal business of the bank, 
that for which it has resources of its own in capital and 
accumulated surplus, and for which it receives the funds 
of others, making payments and collections for them at 
considerable expense. That business is lending money, or, 
more strictly, it is lending credit based upon its resources 
in money. Few realize how largely, in the modern devel- 
opment of production and trade, business is conducted by 
borrowing. The most important form of the bank's lend- 
ing is that known as discounting commercial paper. It is 
that which furnishes the largest accommodation to the 
mercantile community and does most to facilitate the 
operations of trade. As the greater includes the less, the 
more complex the simpler, we will deal with this subject 
as it appears in the working of a large down-town bank in 
New York city, only referring incidentally to variations 
from its methods as it may seem necessary to a full under- 
standing. 

Discounting, as the reader doubtless understands, dif- 
fers from ordinary lending on a promissory note in deduct- 
ing the interest, at the rate and for the time agreed upon, at 
the beginning of the transaction, instead of adding it to 
the repayment at the end. Strictly speaking, banks dis- 
count paper only for their own customers, but they buy 
the notes of others, and that, as a loaning operation, comes 
to the same thing, since they advance the amount of the 
118 



DISCOUNTS AND COMMERCIAL PAPER 119 

note less their charge for the use of their credit, and collect 
at maturity the same as in the other case. Purchased 
notes are included in " bills discounted " in the bank's 
operations. But in discounting for a customer he is 
credited on his account with the sum advanced, instead 
of receiving the money or a check to be deposited else- 
where, and it is partly in that way that deposits are cre- 
ated by loans. They are not only thus created in the bank 
making a discount, but when it gives a check for a note 
they are created in the bank w T here that check is deposited. 
That in part explains why " deposits " and " loans and 
discounts " so nearly keep pace with each other in bank 
statements, and why in active times they may both be 
several times the amount of cash reserve held to meet 
accruing liabilities, and largely in excess of capital and 
surplus. 

One common form of commercial paper subject to dis- 
count is known as " bills receivable." A jobber or whole- 
sale dealer sells goods on time, taking his customer's notes 
for thirty, sixty, or ninety days in payment. Instead of 
waiting for these to mature before getting his money, he 
indorses them over to his bank and gets it to discount them. 
Thereby he gets the money, less the interest, to his credit 
at once, and the bank undertakes to reimburse itself by 
collecting the notes at maturity. Whether such paper will 
be taken depends upon the standing and credit of the 
parties, for banks seek to reduce the risk of loss as much as 
possible, and nowadays inquire closely into credit, as we 
shall have occasion to see a little farther on. The indorse- 
ment makes the customer responsible for payment, but the 
bank wishes to be satisfied of the responsible character 
of the maker as well. The rate of discount is somewhat 
affected by the strength of credit represented by the paper. 
This form of commercial paper is relatively less common 
than formerly, because dealers are less disposed to give 



120 THE MODERN BANK 

this kind of credit, and prefer to make a reduction from the 
price at which they sell " for cash." 

But there is an interval between their buying and 
selling that makes this class of traders large borrowers 
from the banks, even when they do not have bills receiv- 
able discounted. Though they may have ample capital, it 
pays them when business is thriving to borrow for their 
large purchases and to repay from the proceeds of their 
smaller sales. Much of their borrowing is done by offer- 
ing their own notes for discount. These are known as 
" single-name paper/' or they may be strengthened by re- 
ceiving the indorsement of some other person or firm of 
high standing, when they become " double-name " or " in- 
dorsed " paper. The rate may be made lower by a strong 
indorsement. Such paper may run for thirty, sixty, or 
ninety days, or for four or six months, or even a year. 
The rate charged will be affected by the time as well as the 
names. Instead of offering his note to his own bank for 
discount, a man may sell it to another bank, or more likely 
to a note-broker, who may dispose of it to a bank. There 
is a large business of this kind done, as it enables a bor- 
rower to distribute his obligations to advantage, and the 
brokers serve to bring the demand and supply together. All 
this, which is in effect loaning upon commercial paper, 
comes within the purview of the bank's discount depart- 
ment. Except in the largest banks there is a single depart- 
ment of " loans and discounts," but we will deal with 
discounting as a separate matter under the charge of a 
discount-clerk. 

When an application is made for a discount the first 
thing to be done is to inquire into the advisability of grant- 
ing it, a matter which is usually entrusted to the discretion 
of the president or vice-president, subject to the authority 
and responsibility of the directors or a committee to which 
they have deputed it. One consideration is the condition 




Q 
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122 THE MODERN BANK 

of the bank's funds and the state of its loan account. A 
national bank is not permitted to loan more than ten per 
cent of the amount of its capital to any one borrower, and 
in a reserve city it must maintain a cash reserve equal to 
twenty-five per cent of deposits. Whether or not the appli- 
cant is a regular customer, and, if so, the value to the bank 
of his account, are considered. Preference is given to reg- 
ular depositors, with discrimination according to their title 
to accommodation from a business point of view. If the 
application is from an outside person, the credit and stand- 
ing of the applicant is closely scrutinized. We shall refer 
to this scrutiny more fully in treating of the credit depart- 
ment, but for the present will give attention only to the 
manner of negotiating discounts. 

If the application is entertained at all it is entered 
in an " offering-book," with the name of the maker of the 
paper and that of the indorser, if any, the due date, the 
rate of discount, and the amount. The application is re- 
ferred to the credit department, which makes a report con- 
taining certain items regarding the applicant's standing 
and credit and the state of his account. Then, if approved 
by the proper officer, the paper is taken in charge by the 
discount-clerk, the credit is entered to the customer's ac- 
count, or, if it is a purchased note, the bank's check is given. 
The clerk keeps a " discount-register," in which all notes 
are recorded with consecutive numbers and under the date 
of discounting, with entries in separate columns of the 
names of makers and indorsers, interest rate, due date, 
and amount of loan. A " tickler," or book with pages con- 
secutively dated, is also kept, in which they are entered 
under the date at which they become payable, so that the 
distribution of this class of outstanding loans may be 
readily ascertained and the time of making collection may 
be easily kept in mind from day to day. The notes them- 
selves are carefully put away in large bank-wallets 



124 THE MODERN BANK 

with many compartments, arranged in the order of the 
" due dates." A transcript is made each day from the 
discount-register of the " bills discounted " for the use of 
the credit-clerk, who keeps a close account of all such 
transactions. 

When the time of payment is at hand the notes are 
taken out and turned over to the note-teller for collection, 
with a proper exchange of memoranda. Notice may or 










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discount, With colls. . $ ^V""Q 

Without colls. $ (f 7 f~ 

Total. . . . $ " /3 2.. ^1. 

Amount offered £ <<^~cfi-o 

Arnt . of name offered now held, # 4^ * o Du e /^ * 

Actual Balance ...... $ **&* 7 Q. 



Report on Offering for Discount. 

may not have been sent beforehand to the makers. The 
practise differs with different banks, but in any case the 
note-teller attends to the collection, if the payment is to 
be made in the city. If the discount has been made for 
a regular customer, he is presumed to have prepared for 
the payment by keeping up his deposit sufficiently to cover 
it, and he draws his check for the amount due, payable to 
the order of the bank, and it is charged to his account and 
credited to " bills discounted " on the ledgers. If the dis- 
count is on a purchased note, payment may be made with 



DISCOUNTS AND COMMERCIAL PAPER 125 

a check on some other bank or in any regular way. It is 
then credited to " bills discounted/' and the payment is 
accounted for through the note-teller's work and charged 
in his regular debits, unless collection is to be made out 
of town, in which case a " charge " is made to " collec- 
tions." The transaction is closed when all the bookkeeping 
entries have been duly made. 

Discounts are made not only to customers and on the 
notes of persons, firms, and corporations in the city, but 
on notes of out-of-town concerns and " country banks." 
Where the collections are to be made out of town the notes 
are turned over to the corresponding clerk instead of the 
note-teller, to be sent out for collection, but all bills dis- 
counted should be made payable at some bank. With some 
discounting banks it is a requirement. It is only when 
remittances are made that the matter comes into the hands 
of the note-teller, or the mail-teller, who is his auxiliary in 
this branch of collecting, and the payments are duly 
recorded and accounted for as in other cases. 

There is in some of the large New York banks much 
discounting for smaller banks in different parts of the 
country, some of them in remote sections of the West and 
South. Direct rediscounting of notes taken by other banks 
is a common practise with the great banking institutions 
of Europe, and it prevails to a restricted extent in this 
country between strong banks in large cities and their 
correspondents. In such cases the smaller banks discount 
for their customers at a high local rate, and indorse the 
notes and have them rediscounted at a lower rate by large 
city banks. But it is more common in JSTew York, where 
many deposits of country banks are kept, to make the ad- 
vances directly to the banks on their own " paper," taking 
the discounted notes that they hold as " collateral " and as 
evidence that the various sums represented thereby are 
due to them upon certain dates. For instance, a small bank 



126 



THE MODERN BANK 



in Texas may make advances to planters and dealers in 
its section upon their notes with all sorts of security, and 
upon the basis of these it may borrow from a New York 
bank to help carry its mass of small loans. The New York 
bank, if satisfied of its sound condition and credit, of which 
it requires abundant evidence, will discount its note for 
such amount as it requires, receiving payment in the regu- 
lar way of such remote transactions when the note ma- 
tures. The payment may be made by draft or check based 
upon New York exchange. By that time the customers 
of the distant bank are ready to take up their notes, and 
they are returned to it on the discharge of its own debt. 
Many accounts of this kind are constantly running be- 
tween New York banks and borrowing institutions all over 
the country. The latter make their profit on the difference 
between their local rates and those of the financial center, 
while the abundant funds that accumulate in New York 
find part of their employment in all manner of distant 
places. This diffuses their credit widely in assisting pro- 
duction, industry, and trade, and at the bottom of their 
credit are their resources in capital, their general deposits, 



their cash reserve, and their 



skilful management. 



The 



revenue from discounting commercial paper is derived 
from the excess of the repayments over the advances, less 
the cost of conducting this branch of the business. 

The practise of buying notes on an option remains to 
be noticed. A note-broker or a banking firm offers paper 
to a bank upon representations of its credit that appear 
satisfactory on their face, and the bank may take it with 
the option of returning it on a subsequent date, usually 
within a day or two, if not satisfied with its own verifica- 
tion of the business credit of the parties. If so satisfied, 
the discount is confirmed and takes its course. If not, it 
is crossed off and the note is returned to the broker or 
banker who offered it, to be taken elsewhere. 



DISCOUNTS AND COMMERCIAL PAPER 127 

Before leaving this subject a word should be said 
about what determines the rate of discount. In a general 
way it is the same principle that determines the price of 
anything else, the relation between supply and demand, for 
the interest on money loaned is the price paid for its use. 
It is sometimes spoken of as the " value of money/' but 
that is a misnomer. When " money is plenty/' which 
practically means when funds available for loans are 
abundant, and when, on account of dulness in business 
or for any other cause, the demand is light, rates will be 
low because banks are competing with each other for bor- 
rowers to keep their funds in use. When business is active 
and money is kept moving in large volume, there may be 
a heavy demand for discounts and loans in proportion to 
the supply of available funds, and then rates will be high. 
In these conditions much will also depend upon the general 
state of confidence, which is higher in active than in dull 
times, and leads to ready borrowing and the extension of 
credit. Though credit plays such a large part in all busi- 
ness and banking operations, a solid mass of standard 
money must be at the bottom of them, and the expansion 
can not go beyond a certain relation to its volume. Conse- 
quently the volume of money in circulation and in the 
reserves of banks is one factor in determining the rates of 
interest, or of discount, which is virtually the same thing. 
An ample volume of sound money will contribute to ease 
and low rates in the loan market, and a restricted amount 
will tend to curtail credits and make rates high. 

But in the last analysis the general level of interest 
rates, or the price for the use of money, is determined by 
the general rate of profit to be derived from the use of 
capital in the business of the country. Competition in 
various employments for capital tends to bring this to a 
certain level. Where that level is high, owing to the con- 
ditions of industry and trade in the country, the rate that 



128 THE MODERN BANK 

will be paid for the use of borrowed capital is correspond- 
ingly high. Where the profits to be derived from the em- 
ployment of capital are moderate or small, interest rates 
are correspondingly low. Within the range of the influ- 
ences determining what may be called the " general rate " 
or price for the use of money or of credit, differences will 
be caused by a variety of circumstances. Banks will 
charge more where there is any element of doubt as to the 
credit of the borrower or the value of his security. The 
extra charge is in the nature of an insurance against pos- 
sible loss. The time for which the loan is to run will also 
be a factor in determining the rate to be paid for it, though 
that does not always work in the same way. When there 
is a prospect of a falling off in the demand and a decline 
in the general rate, banks will favor long-time paper and 
make some concession on the rate prevailing at the mo- 
ment. If there is a prospect of an increased demand and 
an advance in the general rate, they will be averse to 
putting out credit for long terms and will charge more. It 
is a matter of constant and skilful calculating to adjust 
rates to the best advantage for the banks and for the com- 
munity. 






XVII 

CREDIT DEPARTMENT 

One of the most important developments in modern 
banking is the establishment of a thorough system of in- 
vestigation and record of the credit of those to whom 
advances are made on negotiable paper. Where loans are 
made upon salable collateral securities with a fair margin 
of value above the amount loaned, this credit is a matter of 
less moment. Payment is assured by the power to appro- 
priate and sell the securities, but in the case of the dis- 
count of commercial paper, or accommodation resting 
upon personal or corporate credit, the sole guarantee is 
the character, responsibility, and financial resources of the 
borrower, and of these a conservative and carefully man- 
aged bank requires the most conclusive evidence. In a 
small town, where business relations are simple, bank 
officers may have or may readily obtain sufficient knowl- 
edge of the affairs of their customers to need no elaborate 
system of inquiry, and the extent to which safeguards are 
adopted vary according to the volume and complexity of 
the operations in which the bank is engaged and the care 
with which it is managed. 

What a bank lets out at a certain rate of compensation 
is virtually its own credit, not money, but the power to get 
money. Its credit it must be able to make good at all times 
by promptly meeting its obligations, and when it loans 
it out and only takes the credit of its customers in return, 
the latter must be based upon substantial resources which 

129 



130 THE MODERN BANK 

it can reach and appropriate in default of payment. 
Credit is nothing in itself but the power to command 
value, and the value must exist and be at its command. 
When a bank accepts a " promise to pay " for the use of 
its own resources, it has the right to assure itself in the 
most absolute manner of the ability and readiness of its 
creditor to make the promise good. If it is in the midst 
of a great commercial and financial community, intricately 
connected with the complex system of industry and trade 
of the whole country ; if it has millions of deposits to care 
for and keep in profitable use ; if it is subject to constant 
applications for advances on mere paper-credit from men 
engaged in all manner of enterprises and operations, it 
will find it necessary to take the utmost pains to assure 
itself that the credit it accepts has a sure foundation. 
Otherwise it will be liable to incur losses that will bring 
it to grief sooner or later. Some banks take more risks 
than others and find occasion to write off more losses. The 
strongest and most successful are those that have the most 
thorough and efficient credit departments, and we will 
assume that we are dealing with such a one in the city of 
!STew York. 

It is equipped with a competent credit-clerk and a 
force of assistants, and it has a variety of forms and 
blanks and books of record for its use. It is kept in touch 
with all that is done in the discount department and keeps 
a record of it. It is prepared to furnish that department 
with all the information at its command, and its chief 
business is to accumulate information and have it so 
systematically arranged that it can be brought into in- 
stant requisition. It has a vault in which its accumulated 
information is stored, systematically arranged, and in 
which constant additions are made to it. This is lined with 
drawers arranged on the card-index principle. In one set 
of drawers cards are kept upon which is recorded the 






CREDIT DEPARTMENT 131 

average monthly balance of every customer that has an 
account with the bank. These cards usually have a pocket 
in the back in which special memoranda may be put, and 
as they are alphabetically arranged it is but the work of 
a moment to ascertain in a general w 7 ay the value of the 
account and the title of the depositor to accommodation. 
In another set of drawers is a series of " folders " of strong 
pasteboard so doubled as to form a compartment or recep- 
tacle in which a considerable volume of papers may be 
held apart from all others. There is one for each customer 
or borrower and every individual, firm, or corporation 
whose credit has been a subject of inquiry, and upon a 
projecting edge, sometimes a narrow bevel of wood, the 
name is inscribed or pasted. This set of drawers may be 
divided into two or even three separate sections, one for 
" active " records or those that have frequently to be con- 
sulted, one for those that are less used, and one for those 
that have passed out of use altogether and become only a 
matter of history. Still another set of drawers is used for 
banks with which the bank keeping these records has deal- 
ings and with whose credit it is concerned. 

When an application for a discount, or an " offering " 
of paper, is made there are several questions to be con- 
sidered. One is the state of the bank's funds and its out- 
standing loans and discounts, with their various dates of 
maturity. Another is the claim of the applicant to ac- 
commodation, preference being given to depositors and 
regular customers, w T ith due regard for the value of their 
custom to the bank. Beyond that is the all-important 
question of credit. Statements are required from the 
applicants, and uniform blanks have been devised and 
agreed upon by the bank associations of several States, 
which are in common use by those banks that give careful 
attention to this subject. There are separate forms for 
individual borrowers, for firms, for corporations, and for 
10 



132 THE MODERN BANK 

banks. There are in fact two sets, one of short forms and 
one of long forms, the former being used where minute 
inquiry is not deemed necessary, and the latter when thor- 
ough detail is required. These blanks call for information 
regarding the business and resources of the applicants, 
the amount and distribution of their capital, the various 
items of their assets and liabilities, the investment and 
employment of their funds, the character and value of 
their property of various kinds, buildings, machinery, 
appliances, stocks of goods, cash on hand and in bank, etc., 
the amount and cost of business done, profits, etc. ; in 
short, everything that will give a creditor full knowledge 
of the risk he is taking and full assurance of the capacity 
of the borrower to meet all his obligations. 

When these statements have been filled out with such 
detail as may be required in the individual case, and have 
been duly signed and dated, they are relied upon only so 
far as they are verified and confirmed either by knowl- 
edge of the parties or by inquiry. It is the business of the 
credit-clerk to supplement them to the fullest extent 
practicable by reference to the commercial agencies, by 
personal inquiry or correspondence, and an alert use of 
all available sources of information, and to keep the record 
constantly up to date through all the fluctuations and 
vicissitudes of business. Important subjects of inquiry 
are the personal character and habits and the reputation 
for business ability and rectitude of those concerned and 
their business methods and practises. It is plain that the 
effect of this credit-system is not merely to insure safety 
for the banks in putting their resources widely and liberally 
at the command of the commercial community, not only 
where they are located, but over a much larger area, which 
will greatly enhance their usefulness, but to raise the 
standard of credit and improve the methods of those who 
rely upon the banks for financial accommodation. New 



CREDIT DEPARTMENT 133 

statements are required from time to time as new dis- 
counts are applied for or paper is offered for purchase, 
and the credit-clerk keeps upon sheets headed and ruled 
for the purpose a comparison of the statements, which 
shows in a general way whether the business and resources 
of the borrowers, and consequently their claim to credit, 
are improving or declining. There are separate sheets 
for firms, corporations, and banks, with all the important 
items of the statements printed on the left-hand margin, 
opposite which is noted in successive columns any changes 
that may have occurred for the better or w r orse in the 
intervals of making them. 

It is with the signed statements and reports, letters and 
memoranda resulting from inquiries, that the record is 
made up which is stored in the drawers of the credit- 
department vault. It is not to be assumed that this is 
complete in every case when a discount is made or a note 
is bought from a broker or taken from another bank. It 
is a gradual accumulation, but a conservative bank will 
not make the discount or buy the note until satisfied by 
such evidence as it has of the credit of the applicant. In 
a majority of cases it will know enough about its customer 
or the standing of the makers of the notes to act without 
delay upon the evidence the credit-clerk is prepared to 
afford. Every application is referred to him by the officer 
to whom it is made or by whom it is to be passed upon. 
The clerk has a variety of forms and blanks for use in the 
immediate performance of his duties. Upon these he has 
transcripts of those filled out when accounts are opened 
or closed, copies of the offerings of paper and of the 
records of paper taken, lists of bills receivable of 
different customers that are outstanding, of paper pur- 
chased and bills discounted, whereby he is kept informed 
of the actual state of the bank's discount transactions. 
When paper is offered for discount or purchase it is 



134 THE MODERN BANK 

referred to him on a proper blank, which he returns after 
investigation with a condensed statement on a separate 
form showing the state of the applicant's account with 
the bank, including the accommodation already extended 
to him and the main facts affecting his credit. 

Where paper is offered by a note-broker on behalf of 
some person or concern of whose credit the bank has not 
sufficient evidence, it is taken " on option/' that is, with the 
privilege of returning it on a specified day, and separate 
forms are used for this, including one that instructs the 
note-teller to collect the paper listed upon it, "(not due) 
before the close of banking-hours this day." This is for 
such notes as are to be returned under the option, and the 
collection is made from the brokers or bankers that have 
offered it. Reputable note-brokers have their own means 
and methods of investigating credit, and in many cases 
they have purchased the paper that they offer to banks. 
It behooves them as well as the banks to establish a repu- 
tation for care and trustworthiness. 

In case an out-of-town bank applies for a loan on its 
own paper, it makes and signs by its proper officers a state- 
ment on the special form provided for that purpose, and 
its credit is subject to investigation and careful record 
like that of any other borrower. It is a common practise 
for it to back its note with those of its customers upon 
which it has made advances, as collateral security, or more 
as an evidence of the assets they represent, and of its own 
good faith. Of these the credit-clerk makes a list as part 
of his record of transactions with the borrowing bank. 

There is no more important or valuable part of a 
bank's business than making advances to the mercantile, 
manufacturing, and industrial community on commercial 
paper, and there is a vast volume of this afloat in times 
of business activity, by which the capital and credit con- 
centrated in banks is distributed and diffused to vitalize 



136 THE MODERN BANK 

the currents of production and interchange. While it sug- 
gests the vast scale upon which business is done on " bor- 
rowed money " or on credit, this is always presumed to 
rest upon actual property values in the possession and 
control of the borrowers, and it serves to facilitate a great 
volume of exchange at a moderate charge with a relatively 
small use of actual money. This is a profitable as well as 
a useful field for banking, but in the sharp competition 
of these days, with the intricate network of credit opera- 
tions all the time going on, it calls for consummate ability 
in management, unwearying vigilance, and thoroughgoing 
system. Its mainstay is a well-organized and capably 
conducted credit department. 



XVIII 

LOANS ON COLLATERAL SECURITY 

A bank in a small city or town, or one that has a 
moderate volume of business, has a single department of 
" loans and discounts " under the same clerk, and in most 
cases no separate credit department. But the large city 
banks keep apart their business of loaning on collateral 
security in charge of a " loan-clerk," who devotes exclusive 
attention to it. There is a radical difference between loan- 
ing upon actual salable security and upon paper that 
represents only the credit of the borrower, or his credit 
fortified, or possibly weakened, by that of those with whom 
he has business or personal relations. If the security is 
adequate in the former case, credit is a minor considera- 
tion, for the bank has in its possession property that will 
satisfy the debt, and not merely an uncertain claim upon 
whatever the debtor may have available for his creditors 
in general. 

Collateral loans may be made " on time," for thirty, 
sixty, or ninety days, or four or six months or longer, or 
they may be made payable on demand, or " on call," and 
the purpose of raising money in this way may be as varied 
as the interests of men who have use for money. But most 
commonly such loans are made either for short periods or 
subject to demand, and serve some temporary need of the 
borrower. They differ nominally from discounts in the 
fact that the full amount is advanced and the interest is 

137 



138 THE MODERN BANK 

added to the principal at the time of payment, when the 
security is surrendered, though exceptions are often made 
in case of time-loans in deducting the interest when the loan 
is made. The rate depends upon the time and the state 
of the money market, and may be affected by the char- 
acter of the security accepted, though well-managed banks 
take little risk on the latter score, requiring a margin of 
" market value " 20 per cent or more above the amount 
of the loan. 

There are loans on collateral that have a distinctly 
commercial character. A merchant may borrow upon his 
bills receivable, instead of having them discounted, by 
pledging them as collateral. In case they are accepted as 
security by a bank it has to record them in such a 
way as to keep watch of their maturing. If any become 
payable they must be taken up and replaced with other 
security unless the loan is correspondingly reduced. If 
this is not done, the note may be collected. Banks also loan 
to traders on the security of warehouse-receipts, and some 
having close connection with commercial exchanges and 
boards of trade do a large business in this line. Goods 
coming in bulk for distribution in local markets or for 
export are stored in warehouses and negotiable receipts 
are given, certifying to the quantity and kind — as so many 
bushels of grain, barrels of flour, bales of cotton, hogsheads 
of sugar, or what not — which will be delivered to the 
holders of the receipts when properly indorsed. These 
may be transferred by indorsement, which passes the title 
to the merchandise to the new holder. When pledged for 
a loan from a bank they are indorsed over to it, and that 
gives it a lien upon the goods. It can take possession and 
sell them to satisfy the debt, if the accompanying note is 
not paid with interest at maturity. Loans are often ob- 
tained on warehouse-receipts to take up the drafts held 
by the bank for collecting payment for the same goods, 



LOANS ON COLLATERAL SECURITY 139 

though additional security, or part payment, may be 
required. 

A more common class of security for collateral loans 
consists of stocks and bonds, especially those of railroad 
and industrial corporations. A bank usually has its own 
printed form of collateral note which is filled out and 
signed by the borrower when the loan is made. After the 
customary promise to pay, it includes a list of the securi- 
ties deposited and a form of contract. The note may be 
indorsed with a guarantee of payment by the indorser in 
case the maker should fail to meet it at the date of ma- 
turity or " on demand." By the contract in its usual form 
the borrower gives the bank a lien upon the collateral 
deposited, or any that may be added to it, for payment not 
only of the note, but of any other liability existing or 
that may be incurred. The lien also attaches to any 
balance he may have in the bank or any deposit that he 
may afterward make. To indicate more clearly the effect 
of one of these collateral contracts, it may be well to set 
it forth in full. The form given is one in actual use by 
a leading bank. The guarantor, who may be the owner 
of the securities, signs a consent printed on the back of 
the note. 

Collateral loans on time are made to persons desiring 
to raise the money at once for an investment or a purchase, 
or to carry through any kind of a financial transaction, 
but loaning on call is largely done with Stock Exchange 
brokers. In case of time-loans the rate of interest is agreed 
upon and remains unchanged, but with call-loans it 
changes from time to time to conform to the market rate. 
This is made on the exchange and is determined by the de- 
mand and supply for loanable funds in the money market. 
It is the same on any particular day or at any particular 
time of day at all the banks, and may vary in the making of 
new loans on the same day. A borrower may notify a bank 



140 



THE MODERN BANK 



$<J~O. OOQ . 
THE IRVING 

or Order, at its banking 
hereofaUjierate of 




New Y^k^j^^^^^^L /.<?!.- / g o 3 

On demand, for value received, the undersigned promise to pay to 

NATIONAL BANK OF THE CITY OF NEW YORK, 

in New York City, in funds current at the New York Clearing House, with interest from the date 
per cent, per annum (payable quarterly March 31st. June 30th, September 30th and December 31st) 



-Dollars ; 



having, deposited with the said Bank as collateral security for the payment of this note and of any other liability or liabilities of the 
undersigned or of the guarantors or indorsers hereof to the said Bank, due or to become due or which may hereafter be contracted or 
existing, the following property, viz .-,. 

of the estimated market value of $ ^ ^ 6°^> t the undersigned also hereby giving to the said Bank a lien for the amount of all the 
aforesaid liabilities upon the title or interest of the undersigned in any other property or securities at any time given unto, or left in 
or in any way come into the possession or custody of, the said Bank for safe keeping or otherwise, and also upon the balance of the 
deposit account of the undersigned with the said Bank existing from time to time 

In case the securities at any time pledged for any of the aforesaid liabilities should decline in market value, the undersigned 
agree , without notice or demand, to deposit forthwith with the said Bank additional securities to its satisfaction ; and in case of tailure 
to do so. this note and all other liabilities of the undersigned to the said Bank shall at once become due and payable without demand 
of payment thereof, and the said Bank may immediately sell and apply the said securities in manner and with the effect hereinafter 
provided 

The undersigned agree that in the event of the insolvency of the undersigned or of any guarantor or indorser of this note all 
the aforesaid liabilities shall, at the option of the said Bank, become immediately due without demand of payment thereof 

The undersigned hereby authorize the said Bank at its option at any time to appropriate and apply to the payment of any of 
the aforesaid liabilities, whether now existing or hereafter contracted, all moneys held by the said Bank on deposit or otherwise to the 
credit of or belonging to the undersigned, whether the said liabilities are then due or not due. 

The said Bank is hereby authorized, upon the non-payment of any of the said liabilities when due or made due, to sell, assign 
and deliver the whole of the said securities, or any part thereof, or any substitutes therefor or additions thereto, or any other securities 
or property of the undersigned, or in which the undersigned ha any right or interest, given unto, or left in or in any way come into 
the possession or custody of, the said Bank, at any brokers' board or at public or private sale at the option of the said Bank, without 
either advertisement or notice, which are hereby expressly waived. If such securities or property are so sold at public sale the said Bank 
may itself purchase the whole or any part thereof free from any right of redemption on the part of the undersigned, the same being 
hereby waived and released 

In case of sale made for any cause, after deducting all costs or expenses of collection, sale or delivery, the said Bank may 
apply the residue of the proceeds to pay either one or more or all of the aforesaid liabilities, whether then due or not, as it shall 
deem proper, making proper rebate for interest on liabilities not then due and returning the overplus if any to the undersigned, or at 
its option to any guarantor or indorser of this note who shall make payment thereof, the undersigned agreeing to be and remain 
liable to the said Bank for any deficiency arising upon such sale or sales 




Form of Collateral Loan Note embodying Contract oe Borrower. 



holding his collateral note and securities that the rate has 
fallen on the exchange, or the bank may notify him that 
the rate on his loan has been advanced, but in any case the 
prevailing rate is applied each day until the loan is paid 
or called in. 



LOANS ON COLLATERAL SECURITY 141 

The funds available for call-loans constitute an elastic 
margin in the bank's resources, which is in a sense a 
regulator of its operations. When the demand for dis- 
counts and time-loans is slack, these loans afford an outlet 
for funds that would otherwise be idle, at a rate deter- 
mined by the demand. If the rate is low, it will be an 
incentive to speculation, if other conditions are favorable, 
and that will increase the demand and tend to put up the 
rate. The loans can be called in whenever there is a better 
use for the funds or there is danger of the reserves running 
too low, and conservative banks may refuse to loan at the 
ruling rate if speculation seems too reckless or there is 
an undue expansion of credit. The bank may prefer to 
invest some part of its funds in the actual purchase of 
securities, but it will be averse to having any considerable 
amount in excess of the reserve lying actually idle, for 
then they are earning nothing. The borrower has the 
same privilege of paying at any time that the bank has 
of calling for payment. In some cases it is agreed that 
a certain notice will be given of calling in a demand- 
loan. 

Whether a loan on collateral security is on time or at 
call, it has to be passed upon by an authorized officer of 
the bank, and, if the funds are available, the main con- 
sideration is the sufficiency of the security. A margin of 
20 per cent of " market value " above the amount of the 
loan is usually required, but discrimination is exercised 
as to the character of the security and its liability to 
fluctuate in value, and it must be " approved." Once the 
transaction is authorized the details are taken in charge 
by the loan-clerk. The borrower or his agent presents at 
the loan department the evidence that his application and 
his collateral have been duly approved. The " collateral 
loan-note," duly signed, is taken by the clerk and the securi- 
ties are verified and listed. The loan is entered in a " col- 



142 THE MODERN BANK 

lateral loan " book, or " register/' properly ruled with col- 
umns appropriately headed for the different entries. These 
include the name of the borrower, the list of collateral with 
value, date of note, rate of interest, time and due date, if 
it is a time-loan, amount and interest, date of payment, 
if on demand, and a space for signing a receipt when col- 
lateral is surrendered on payment. The securities are 
placed in a strong envelope, called the " inside envelope," 
upon which is printed the name of the bank and the char- 
acter of the loan, with space for the number, page of 
record, name of borrower, amount of loan, and rate of 
interest, with a ruled space below for a list of the securi- 
ties. A separate slip is filled out headed in much the same 
way, with a list of the collateral, and there is an " outside 
envelope," in which the other is to be placed with the slip, 
ruled to indicate the amount of loans made to the particu- 
lar borrower, the amounts paid thereon from time to time, 
and a list again of the collateral. 

When the loan has been entered in the register, if the 
borrower is a depositor in the bank the amount is placed 
to his credit at the bookkeeper's desk from a memorandum 
furnished by the loan-clerk, and he can draw his checks 
upon it. If he is engaged in stock dealings or other active 
operations, his checks will ordinarily be presented for 
certification before they are used, and sometimes they may 
be certified beyond the limit of his deposit, though tech- 
nically that is illegal, but not beyond the limit of his 
security, and with the understanding that the deficiency 
will be speedily made good. The " overdraft " is in the 
nature of an additional temporary loan. If the borrower 
is not a depositor he receives the bank's check for the 
amount of his loan, which he may deposit in his own bank 
or use otherwise like any bank-check. The loan being duly 
recorded, the securities are carefully put away with the 
proper labels, the envelopes being placed in alphabetical 







So. 



4*f 



(INSIDE ENVELOPE.) 



Page 



?r 



THE IRVING NATIONAL BANK 

/^I90^ 



Or THE CITY OF NEW YO^F 

New Yorkf" 




DEMAND LOAN TO 







Inside Envelope for Collateral Securities (0:7 greatly Reduced 

Scale). 



I 44 THE MODERN BANK 

order in a case that is kept in the bank's strong vaults, 
though during banking hours they are accessible to the 
loan-clerk, for changes may be required from time to time. 
Payments may be made, additional amounts may be bor- 
rowed, securities may be added or withdrawn, or substi- 
tutions may be made, all these being duly recorded in the 
loan-book, or register, and upon the envelopes and slips, 
so that the condition of the account may be readily ascer- 
tained at any time. Changes in the rate of interest are 
also noted, with dates. 

The substitution of one security or lot of securities for 
another is frequent in the loan accounts of active brokers. 
Stocks may be put up as collateral which the broker has 
paid for from the proceeds of the very loan for which they 
are in part the security, having bought them for a customer 
on margin. He may afterward have to deliver them on 
payment by his client, or he may sell them again for the 
client and have to turn them over to some one else. He 
sends an order for them, and unless the loan is to be pro- 
portionately reduced by payment, he sends other securities 
of equal value to be approved and to take their place. 
Many such changes may be made during the life of a 
collateral loan. The loan-clerk has to keep a careful record 
of these and to maintain a close watch over any fluctuation 
in the market value of the securities. In case of a ma- 
terial decline additional collateral will be called for with- 
out increase of the loan; or some withdrawal may be 
permitted without its reduction, if there has been a ma- 
terial advance in market values. Some banks have a ^ 
thorough system of recording the quotations of the Stock 
Exchange and noting every change in the securities which 
they hold as collateral. They have a card for each loan 
upon which is inscribed the name of the borrower, the 
amount and terms of the loan and a list of the securities, 
with their value, and ruled spaces for noting changes. In 



LOANS ON COLLATERAL SECURITY 145 

a room reserved for this use there is a stock-ticker and a 
financial news-ticker, and the quotations of different stocks 
are written on a blackboard. When a change appears in the 
price of any security held as collateral, it is noted on tne 
cards for the loans affected. If it carries the security be- 
low the required margin of value, the borrower is called 
upon to make the margin good by an addition or substi- 
tution of securities. There are times of excited specu- 
lation and violent fluctuations when this becomes 
important. 

Payments of interest or any part of the principal, or 
of a loan in full, are made to the loan-clerk and he makes 
the proper record. The checks with which payment is 
made are turned over to the note-teller to be entered in his 
accounts, and from him they take the course of other 
checks through the Clearing-House exchanges. If there 
is a loan paid otherwise than with checks to be collected 
through the Clearing-House the collections are made in the 
ordinary way of other payments. From the loan-clerk and 
note-teller's records the proper transcriptions are made by 
the bookkeepers. 

Every time any collateral security is withdrawn, the 
borrower, or an authorized messenger bringing his order, 
signs a receipt, and when the loan is closed and all the 
collateral given up, the full record is shown upon the slips 
and envelopes referred to above. These are filed away and 
kept, and if any question arises regarding a loan, even a 
year or more afterward, it can readily be looked up and 
its whole history ascertained. This is easier than trac- 
ing it in the books, but the system prevails only in banks 
with a large collateral loan business. The volume of this 
kind of loaning varies greatly and the methods of dealing 
with it vary correspondingly. The account here given 
applies to large banks with an active business in this par- 
ticular line. This is the case with a number of institutions 



146 THE MODERN BANK 

in ~New York having a considerable Stock Exchange clien- 
tele. Time-loans on collateral security, however, are 
common with most banks in important commercial and 
financial centers, the great volume of corporate securi- 
ties being much used as the basis of borrowing for all man- 
ner of purposes. They furnish banks the means for a 
profitable lending of funds that accumulate in excess of 
other needs, and call-loans enable them to use these in a 
way to have them at easy command. The tendency of 
recent years has been for a great mass of surplus funds 
to drift to New York to be employed in this way. When 
speculation is rife call-loans command a high rate, and at 
other times it may be as low as one or two per cent. Their 
safety lies in the ready salability of the securities, and that 
is only assured where there is a large Stock Exchange busi- 
ness all the time going on, as in New York, or some other 
important financial center. 



XIX 



BILLS OF EXCHANGE 



The use of checks, individual drafts, and bank-drafts 
has perhaps been made sufficiently clear. Cashier's checks 
and certificates of deposit have been incidentally men- 
tioned, but may need further explanation. The cashier's 
check is practically the bank's order upon itself for pay- 
ment from its own funds. It may be cashed by the pay- 
ing teller when indorsed by the payee, or it may be 
deposited in another bank. It is used in buying notes, bills 
of exchange or other securities, and in making loans to 
outside parties, also in paying various bills of the bank 
for expenses or supplies. A special form is used in pay- 
ing dividends to shareholders. Cashier's checks are 
usually made up in books with stubs upon which to note 
date, amount, and nahie of payee, and are consecutively 
numbered. A register is kept of all such checks issued, 
a cashier's account being also kept in the general ledger 
of the bank. A separate record is kept of the dividend 
checks. 

Certificates of deposit have been mentioned as used 
in making transfers of money to a distant place, but they 
are quite extensively used for other purposes. A person 
may deposit a sum of money in a bank merely for safe- 
keeping or for the use of another person and receive a cer- 
tificate signed by the cashier. This certifies not only that 
the sum has been deposited, but that it is payable to the 
11 147 



148 THE MODERN BANK 

order of the depositor himself, or that of another person 
whom he may designate as the payee. It may be made 
payable on return of the certificate properly indorsed, or 
on its return after a certain time. In the latter case inter- 
est may be allowed on the deposit, but in no case can it be 
drawn upon except by presenting the certificate, and no 
partial payments will be accepted, unless on cancellation 
of the certificate and the issue of a new one for the balance. 
It may be transferred by indorsement, and a common use 
of such certificates is to transfer funds to persons at a 
distance. A man in New York desiring to transmit money 
to another in Chicago, or any distant place, may deposit it 
in a New York bank and obtain a certificate of deposit 
payable to the order of his friend or creditor and send it 
to him wherever he may be. Any bank where he is identi- 
fied and vouched for will cash it for him, for it is equiva- 
lent to so much " New York exchange " and will enable 
the bank to have the sum transferred to its credit in New 
York. A person starting on a journey may obtain a cer- 
tificate of deposit, or more than one, for use in raising 
funds on his way. Banks do not hesitate to honor each 
other's certificates if assured of their genuineness, the 
rights of the holder, and the standing of the issuing bank. 
They stand for deposits of actual money which can be di- 
verted to no use but their redemption on return to the bank 
that has received the funds, though the right to payment 
may be transferred on the way and applied to credits be- 
tween banks. They may also be deposited and make their 
way through collections and clearings. 

The bank keeps the same careful account of its issue 
of certificates of deposit as of its other obligations. While 
they are out they are among its liabilities and must be 
recorded and reported as such. They are numbered con- 
secutively and entered in a register, with date, name of 
person to whom or in whose favor they are issued, and the 



BANK MONEY-ORDERS 149 

amount. There is also a column for due-date when they 
are payable after a certain time, and for the date of actual 
payment, to be entered when payment is made. It is also 
usual to enter the same data upon a ticket, when applica- 
tion is made for a certificate, and this is marked by the 
teller when he receives the money, used by the clerk who 
fills out the certificate, and passed with it to the cashier 
when he signs it. Then it is filed away as a voucher. A 
ledger-account of all certificates of deposit is kept, from 
which the number and amount of those outstanding can 
always be ascertained. 

A movement has been lately on foot for the issue of 
money-orders for small sums, a hundred dollars or less, 
similar in purpose to the postal money-orders of the 
Government, but in form more like a bank-draft, with a 
line of figures across the end, in multiples of five or ten, 
up to one hundred, to be punched out as denoting the limit 
within which the draft is made, the exact amount being 
written, as on check. It is intended that these may be 
bought at any bank for a small commission upon the sum 
and cashed at any other bank. A reason for adopting this 
plan of sending small sums of money is not only that it is 
a legitimate banking function, in which there may be 
some little profit, but that the practise has become common 
of depositing postal money-orders, leaving the bank to 
collect them at the post-office without charge. It may also 
be called upon to transfer post-office receipts to Washing- 
ton without compensation. The proposal has been made 
in certain State bank associations to establish a charge for 
collecting express and postal money-orders, and to issue 
bank money-orders in competition with the express com- 
panies and the Post-Office Department. Many small 
banks find the present system something of a burden and 
see the chance for a little gain for themselves in the new 
plan. A form of money-order between certain banks hav- 



150 THE MODERN BANK 

ing direct relations with each other has long been in use, a 
specimen of which is given on the next page. 

Banks issue letters of credit, though those used by 
travelers in foreign countries are usually obtained from 
private banking-houses which have connections abroad. 
Domestic letters of credit are used to some extent in a 
similar way by persons traveling over long distances and 
absent from home for some time in this country, and many 
banks are prepared to furnish them. They are also some- 
times used for commercial purposes. A man who goes to 
several cities to make purchases or payments may obtain 
a " commercial letter of credit/' upon which he can raise 
money for his purposes at convenient points on his way. 
He buys it of his bank, and it is addressed either to certain 
banks in the places he is to visit or to banks in general, 
requesting them to honor his drafts upon the bank issuing 
the letter within the amount designated upon its face. If 
they are correspondents of the issuing bank, it is a part 
of their business, but in any case they are usually will- 
ing to cash drafts on account of a New York letter 
as they furnish them with " exchange on New York," 
which is always in demand. Each payment is in- 
dorsed upon the back of the letter with the date. The 
document always bears upon its face the signature of the 
person for whom it is issued, which serves as a means of 
verifying his signature to the drafts. If anything remains 
unpaid on the return by the holder of the letter of credit, 
the bank will redeem it. Whether a commission is 
charged for a letter of credit depends upon circumstances. 
If it is for a considerable amount and is likely to be out- 
standing some time, there may be no charge, as the bank 
will have the use of the money while it is undrawn and 
to the extent that it remains undrawn, until the return of 
the letter. It is hardly necessary to say that a careful 
record is kept in the cashier's account of all dealings in 




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152 THE MODERN BANK 

letters of credit. Those used by travelers abroad will be 
more fully treated in a chapter on Private Banking-Houses. 
Foreign bills of exchange will also be more fully 
treated in another chapter, but some incorporated banks, 
especially in New York, have come to deal with them ex- 
tensively since the financial relations between that city 
and European money centers have become so highly 
developed, and all banks have more or less to do with them. 
In their general character they are simply drafts, drawn 
by a person or bank in one country upon a person or bank 
in another country, and are used in making payments or 
transferring funds in foreign trade and international 
financial transactions. Only a few banking institutions 
engaged in a general domestic business draw foreign 
bills or trade in them, but any bank will take them from 
its own customers and " collect " by selling them to bank- 
ers at the current rate. The few that make a business of 
dealing in foreign exchange have a department in charge 
of a foreign exchange-clerk whose methods are practically 
the same as those that prevail in private banking-houses. 
He keeps a careful record of the transactions in buying 
and selling bills of exchange, and a " foreign exchange " 
account figures in the general ledger of the bank. 



XX 

PROTESTS 

There are various matters to which passing reference 
has been made that may be conveniently brought together 
at this point in a miscellaneous chapter. Banks perform 
a variety of services for their customers which are rather 
outside of the regular course of business, or only inciden- 
tal to it. They not only sell bills of exchange for them 
and collect interest-coupons, but they sometimes receive 
dividends upon their shares of stock and credit these 
regularlv to their account. This is done on orders to the 
corporations issuing the stock to pay the dividends to the 
bank for the account of the shareholder. Some banks 
that have a large number of depositors with merely per- 
sonal accounts do a considerable business of this kind. 
They have a regular form of standing order to be filled 
out and signed by the customers requiring this service and 
kept on file by the corporations to which they are ad- 
dressed. The dividend-checks are made payable to the 
order of the bank for account of So-and-so and sent to it. 
The bank credits the amount to the customer and collects 
the checks or sends them through its Clearing-House ex- 
changes. 

Such a bank usually keeps three card-indexes alpha- 
betically arranged: one of the names of customers for 
whom it receives dividends, with a note on each card 
of the corporations whose shares the customer holds; 
another of the corporations, with a note of the elates on 
which their dividends are payable; and a third which con- 

153 



154 THE MODERN BANK 

tains upon each card the name of the corporation and 
a list of the shareholders whose dividends the bank receives 
from that corporation, with columns for ticking off 
under the several dates the receipt of the dividends. The 
clerk who has charge of this branch of business makes the 
entries on the cards and keeps watch of the coming due of 
dividends, and in case of delay in receiving them sends a 
letter of inquiry. He also sees that the credits are duly 
made in the ledgers and keeps a record of his own work, 
giving due notice to depositors of his receipt or failure to 
receive their dividends. 

The stocks are not in possession of the bank, as it only 
acts as an agent to receive and account for the dividend 
payments, and at certain dates, when these are due, which 
is usually on the first of certain months, substantial addi- 
tions are made to deposits from this source. The bank 
will also buy stocks or bonds for customers upon their 
order through a regular broker and charge to their account 
the cost plus the commission, or will sell securities for 
them and credit the proceeds. Some employ a regular 
stock and bond clerk and have a separate department for 
this work, while others have a " general clerk " who com- 
bines this with other duties, such as issuing letters of 
credit and keeping account of them, selling bills of ex- 
change, etc. A bank may act as financial agent for cus- 
tomers in a variety of ways, such as making subscriptions 
to new stocks and attending to their registration or trans- 
fer, exercising options allowed to stock or bond holders and 
notifying them of their rights, and otherwise looking after 
interests which affect their accounts with the bank in the 
way of receipts or payments. Some incorporated banks 
establish foreign connections and deal regularly in ex- 
change, issuing bills of their own, and buying and selling 
those of others, though this business is more generally 
done by private banking-houses. 



MISCELLANEOUS SERVICE, CORRESPONDENCE 155 

The correspondence department has heretofore been 
referred to only in connection with making out-of-town 
collections of checks, drafts, notes, etc., but every large 
bank has a great volume of miscellaneous correspondence 
not relating directly to these. There are letters of advice 
and inquiry of various sorts received which may concern 
different departments of the bank's work, and nearly all 
require acknowledgment or reply, while the bank itself 
has letters of advice and inquiry to send out. Where 
there is a mail-teller the incoming mail is first received 
and opened by him for the purpose of obtaining remit- 
tances. Where there is none, this is attended to by the 
receiving teller, the primary purpose being to secure the 
early credits and the " additions " to the Clearing-House 
exchanges. But all letters are promptly turned over to 
the corresponding clerk, who is responsible for their care 
and must see that all requiring attention are duly attended 
to. A full synoptical list is made, upon which each letter 
is noted by date and a brief indication of its character. 

There are different systems of disposing of the mail. 
In some banks it is the duty of the corresponding 
clerk and his assistants to attend to all acknowledgments 
and replies. For the former and many of the latter there 
are regular printed forms to be filled out, having the name 
of the cashier printed at the end, to which the clerk merely 
appends " per " and his initials. Those that are not of a 
mere routine character and require special replies, the 
clerks answer by obtaining the necessary information from 
the proper department. In important cases they are re- 
ferred to officers for instructions and submitted to them for 
approval and sometimes for signature. In exceptional cases 
an officer may write or dictate letters himself instead of 
merely giving directions to a clerk, but whenever a letter 
leaves the hands of the corresponding clerk to be retained 
for consideration or possibly for reply by another, he 



156 THE MODERN BANK 

takes a receipt for it, and he must follow the matter up 
and see that all necessary replies are made and the letters 
returned to him. 

Under another practise, the letters that concern mat- 
ters outside of his own immediate department and that 
of collections the corresponding clerk distributes among 
those in charge of the departments to which they relate, 
to be answered by them, and takes a receipt in all cases. 
The letters must come back to him, and all answers or 
separate letters of advice or inquiry or of any kind, which 
he is not instructed to write, must also come to him to 
be mailed. The correspondence incoming and outgoing 
centers in his department however the details may be dis- 
posed of, and he is responsible for seeing that nothing is 
neglected or unnecessarily delayed. It is cleared up as 
closely as possible every night, and the lists are run over 
the next morning to see what has been disposed of and 
what is still held back. The letters received on a particu- 
lar date are kept together, with the synoptical list and 
receipts for such as may be held back, and these are all 
kept on file. Being kept in the order of dates and always 
accompanied by the list, they can be readily referred to, 
if necessary, but as a rule everything is finally disposed 
of before they are filed away. These letter-files are allowed 
to accumulate for years, and are never destroyed until 
everything they relate to is outlawed beyond question. All 
letters sent out are copied. Reference has been made to 
the press-copying machine, but most banks still prefer to 
have the copies made in books by the old form of press. 
As all letters are dated and are copied in chronological 
order, there is no need of indexing. The correspondence 
department of a bank is one involving a great variety of 
detail, and its work has to be kept up promptly and sys- 
tematically to insure care and accuracy and thorough 
attention to everything that comes or goes by mail, 






MISCELLANEOUS SERVICE, CORRESPONDENCE 157 

Another matter that has been referred to only in an 
incidental way and may require further explanation is 
that of protesting unpaid checks, drafts, or notes. The 
main purpose of making a formal and solemn protest 
under the seal and signature of a duly commissioned 
notary, when payment is refused, is to give notice to in- 
dorsers that they may be held responsible, and to have 
evidence of the fact that will be recognized by courts as 
conclusive. The check, draft, or note must be presented 
at the proper place, and failure to pay must occur before 
the matter is turned over to a notary, and he must per- 
sonally make the demand again and get a refusal before 
making the protest. A time-draft may be protested for 
non-acceptance as well as non-payment, and a note must 
be presented on the day it is due to make the protest 
effectual as a notice to indorsers. The notary certifies 
that he has presented the document at such a place on such 
a date and that payment has been refused for such a rea- 
son, or for no reason, and makes his solemn protest. He 
must send notice of the facts to all indorsers if their ad- 
dresses are known, and failing that, to the place where 
the payment should be made. 

When a check or draft deposited by a customer and 
indorsed by him is returned as not good, it is not cus- 
tomary to protest it, as that involves fees and the matter 
can be arranged by returning the check or draft to the 
depositor and charging the amount to his account; but 
checks and drafts sent from a distance to be collected are 
protested unless there are instructions to the contrary. 
If they go through the Clearing-House and are returned 
unpaid, that constitutes the first presentation and refusal, 
and they are turned over to the notary to be presented 
again. Others are presented in due course by the bank 
messenger and then sent to the notary. His certificate 
is attached to the check or draft and it is returned to the 



158 THE MODERN BANK 

correspondent from which it came, after the amount, with 
protest fees and postage, has been charged to the corre- 
spondent's account. The hank receiving a protested check 
or draft which it has sent out for collection charges it, with 
the fees and expenses, to the person depositing it or leav- 
ing it for collection and sends him the documents. The 
banks are then done with it, and the customer has recourse 
to the person whose payment to him has proved not to be 
good. 

With a note the case is somewhat different. If it is 
payable at a bank and payment is refused by the bank the 
note and certificate of protest may be sent to it. A bank 
that has discounted or purchased a note that is dishonored 
may bring suit for recovery against either the maker or 
indorser, or both, and it is customary, for the sake of the 
notary's evidence, to make protest even when there is no 
indorsement or the maker and indorser are the same. Care 
is exercised in protesting lest non-payment be due to acci- 
dent or inadvertence, and every reasonable effort is made 
to secure payment before resorting to what is regarded as 
an extreme measure. Usually a record is kept of all cases 
of protesting. A matter requiring mention is the fact that 
in some States the law still allows three days' grace for the 
payment of notes after they fall due, and notice must be 
taken of that fact in collecting notes in such a State. 






XXI 

THE CIRCULATION OF NATIONAL BANKS 

In a subsequent chapter dealing with the national 
bank system, and in a previous one describing the organi- 
zation of a bank under the law, the requirements for tak- 
ing out notes and for increasing or reducing circulation 
are sufficiently explained, but there are matters connected 
with the part circulation plays in the business of the bank 
that need special reference. Notes are put in circulation 
by the simple process of paying them out like any other 
" cash " in the bank's transactions, and when they are once 
out no distinction is made between them and the notes of 
other banks. In the handling of money and the keeping 
of the teller's accounts bank-notes are kept distinct from 
legal-tender and coin certificates, for the reason that the 
latter are available for reserves, while in national banks the 
former are not. As all banks are required to receive the 
notes of other banks, and as they pay them out without ref- 
erence to their origin, they all circulate together as a com- 
mon currency and no attention is paid to the name of the 
bank that issues them. While every bank is bound to re- 
deem its own notes on demand, it is seldom that any demand 
is made, because the Government has made itself responsi- 
ble for their redemption, and any one can get " lawful 
money " for them by sending them in for the purpose in 
sums of not less than a thousand dollars. Little of this is 
done except by the banks themselves. They have two rea- 

159 



160 



THE MODERN BANK 



sons for doing it. They may have occasion for more legal- 
tender notes or other forms of lawful money, and they can 
obtain them by sending an equivalent amount of bank-notes 
to the Redemption Bureau in the Treasurer's Office at 
Washington ; or they may wish simply to get rid of an 
accumulation of worn or mutilated notes, and the process 
of redemption serves the purpose of keeping the circulation 
clear of these. 

ISTotes are constantly coming in for redemption at the 
bureau from all over the country, being sent almost in- 
variably by banks that have accumulated a mass of 
mutilated, worn, or soiled currency, or that desire a fresh 
supply of " legal tenders/' They consist of a miscella- 
neous lot of " bills " of different banks and of various de- 
nominations. There is no direct charge for the cost of 
redemption, but the expense of the bureau is charged to 
the banks in proportion to the amount of circulation re- 
deemed for each, and this charge is collected once a year. 
" Lawful money " is sent at once to the applicant out of 
the 5-per-cent redemption-fund of the banks whose notes 
are redeemed, and the cost of transmitting this is directly 
charged to the bank sending the notes in and receiving the 
legal-tender money. The redeemed notes are assorted and 
classified according to the banks issuing them; those that 
are in good condition are sent to those banks as still " fit 
for circulation," the worn and mutilated ones are destroyed 
and new ones are sent to replace them. This process is 
going on all the time, with practically no effect upon the 
volume of circulation. Each bank, any of whose notes 
have been thus redeemed by the Government, receives 
notice with the new notes or in advance of them, and is 
required to replenish its share of the redemption-fund. A 
circulation account is kept in the General Ledger of the 
bank in which these incidents are noted, circulation being 
charged with the amount sent to keep up the 5-per-cent 



CIRCULATION OF NATIONAL BANKS 161 

fund and credited with the notes received, leaving the cash 
account unaffected. 

A " circulation-book " is also kept which exhibits at 
all times the state of the outstanding circulation, of which 
a report must be made to the Comptroller of the Currency 
twice a year, stating the average for six months. Upon 
this the half-yearly tax is levied of \ of 1 per cent 
upon such as is secured by 2-per-cent bonds and \ of 
1 per cent upon that secured by other Government bonds. 
The report has to be made within ten days of the end of 
June and December, and the tax is collected in July and 
January. In the circulation-book the total amount of the 
bank's circulation is entered in one column and is divided 
in consecutive columns into the amounts of each denomi- 
nation, 5s, 10s, 20s, etc., so that the number of " bills " 
outstanding of each denomination may be readily ascer- 
tained. Not more than one-third of the circulation can 
consist of 5s, and it may be desirable to know what amount 
of each denomination keeps in circulation most readily. 
Changes are noted down the columns against successive 
dates, as notice of redemptions are received, and as notes 
come in to replace those redeemed. While the total cir- 
culation may be all the while the same, the amount 
actually outstanding and subject to tax varies over a nar- 
row margin, those being deducted which are in hand for 
reissue or with the Treasurer at Washington for redemp- 
tion. When there are actual additions or withdrawals the 
amounts enter of course into the book-accounts. 

These latter changes are made at irregular intervals, 
and are determined by the state of the money market and 
the price of the bonds required for security. When there 
is a plenitude of funds and it is difficult to keep them 
placed at a reasonable profit there may be a saving in with- 
drawing circulation. Then lawful money is deposited with 
the Treasury or at a Sub-Treasury for the purpose, and 



162 THE MODERN BANK 

when it reaches the Treasurer at Washington it is held for 
the retirement of an equivalent amount of the bank's notes 
as they come in from the bank or from any other source, 
and bonds to the same amount are surrendered and re- 
turned to the bank, which may then dispose of them or 
hold them in its own keeping. It is relieved of so much 
of its idle funds and of the tax upon so much of its cir- 
culation. If at a later period there comes such a demand 
for money and such an advance in interest-rates as to 
make it worth while, the bank may restore its circulation 
to the old volume, or increase it by making a new deposit 
of bonds and applying for new notes. The application will 
be similar to that made in originally taking out circula- 
tion, except that new plates will not be required. It will 
designate the number of sheets desired of different de- 
nominations making up the total asked for, and these will 
be printed and forwarded when all the 'formalities are 
completed. The profit on circulation is determined by 
the prevailing rate of interest for money. In calculating 
it one must take into account the interest on the bonds 
deposited, the interest to be derived from the circulation 
itself, with deductions for expenses connected with it, in- 
cluding the tax, and compare with this the interest that 
might be derived from the amount of capital invested in 
the bonds at their market price. If money is worth 6 per 
cent and the notes are in constant use, the profit will be 
about f of 1 per cent with the 2-per-cent bond security 
and considerably less for the others. The determining 
factor, apart from the tax, is the premium on the bonds. 



XXII 

THE BANKING RESERVE 

In European countries where there are great central 
banks, these institutions hold a large amount of coin and 
bullion to meet current demands. That fund is what is 
known in this country as a " reserve." As the demand is 
liable to come from other banks and bankers, who keep 
large deposits in the central institution and use its notes 
as cash, this is virtually the banking reserve of the whole 
country. The Bank of England usually maintains a re- 
serve of 40 to 50 per cent of liabilities, but none of this is 
held against its notes, which are fully secured in the issue- 
department. The Keichsbank of Germany is required to 
keep a reserve against its notes, but it has a much larger 
amount than this requirement, because it practically 
holds the reserve for other banks. The Bank of France 
also maintains a large reserve in coin and bullion, though 
it is not required by law to hold any definite fund for the 
redemption of the notes or for any other purpose. This 
stands against all liabilities and is the basis of the whole 
banking system of the country. The result is that in the 
countries named, and in most countries of Europe, the cen- 
tral bank, which is associated more or less closely with 
the Government, contains the bulk of the gold and silver 
coin and bullion not in actual circulation. 

In this country the condition is entirely different. 
The Government itself holds a large fund of coin and bul- 
lion, a part of which is for the redemption of its own legal- 
12 163 



164 THE MODERN BANK 

tender notes, and a much larger part is a trust fund upon 
which it issues gold and silver certificates for circulation. 
Under the national banking law each bank is required to 
keep its own reserve. This is not at all for the redemption 
or security of its notes, but for the prompt payment of all 
demand liabilities, and accordingly it is made a certain 
percentage of its deposits. It must be kept in '" lawful 
money/' which includes gold and silver coin and the cer- 
tificates representing it, and the legal-tender notes of the 
United States. The banks are also allowed to count in 
their reserve the 5 per cent of circulation kept on deposit 
with the Treasurer of the United States for the redemption 
of their notes, and their own Clearing-House certificates 
issued upon actual deposit of coin and used for the settle- 
ment of balances. Provision is also made for the issue 
of United States note-certificates on deposit of " legal 
tenders " in sums of not less than $10,000. These must 
be in denominations of not less than $5,000, and may also 
be included in reserves. 

Any bank outside of a " reserve city " is required to 
have " at all times on hand in lawful money " an amount 
equal to 15 per cent of its deposits, and those in reserve 
cities have to keep 25 per cent of deposits. The reserve 
cities named in the original act were Albany, Baltimore, 
Boston, Cincinnati, Chicago, Cleveland, Detroit, Louis- 
ville, Milwaukee, New Orleans, New York, Philadelphia, 
Pittsburg, St. Louis, San Francisco, and Washington. It 
was afterward provided (in 1887) that any city having a 
population of 50,000 or more might be made a reserve 
city on application of three-fourths of its national banks, 
which must thereafter keep 25 per cent reserves. Under 
this provision Brooklyn, Indianapolis, St. Paul, Minne- 
apolis, Kansas City, St. Joseph, Omaha, Savannah, Hous- 
ton, Des Moines, Lincoln, and Portland (Ore.) have been 
added to the list. National banks in other places are per- 



THE BANKING RESERVE 165 

mitted to keep three-fifths of their reserves in the form 
of balances due from " associations approved by the Comp- 
troller of the Currency " in one or more of the reserve 
cities, and banks in reserve cities are authorized to keep 
one-half of their " lawful money reserves in cash deposits 
in New York " as a central reserve city. Under the same 
act that provided for additional reserve cities, any city of 
200,000 inhabitants might be made a central reserve city 
on application of three-fourths of its national banks to the 
Comptroller of the Currency, with the approval of that 
officer, and Chicago and St. Louis have been made such. 

The reserve required by law was intended to be a mini- 
mum, and any bank whose reserve fell below the legal 
limit was forbidden to increase its liabilities by " making 
any new loans or discounts, otherwise than by discount- 
ing or purchasing bills of exchange payable at sight," or 
to " make any dividend of its profits," until the required 
proportion had been restored. The Comptroller may 
notify the bank to make good its deficiency, and, if it fails 
to do so for thirty days, he may put it in liquidation with 
the concurrence of the Secretary of the Treasury. The 
provision which allow T s banks in other places to keep three- 
fifths of their reserve as deposits in reserve cities and those 
of reserve cities to keep half their cash reserves in a cen- 
tral reserve city, has had the effect of concentrating these 
reserves largely in the New York Clearing-House banks, 
and somewhat weakening the aggregate as security against 
demand liabilities. The country banks are practically re- 
quired to keep only 6 per cent of their own deposits in cash 
on hand, and they are liable to demand any part of the re- 
mainder of their reserve from the reserve banks in " lawful 
money," though their deposits with those banks may consist 
mainly of credits. The reserve cities may, on account of 
these demands or their own needs, withdraw their cash 
deposits from central reserve cities, of which New York 



166 THE MODERN BANK 

contains at all times by far the largest amount. The effect 
of this upon the reserve supply, and consequently upon the 
amount of deposits to be held and the ability to make loans, 
is obvious. 

State banks in New York, and in most States, are re- 
quired to keep reserves of L5 per cent of deposits and are 
allowed to keep them in part in other banks. Trust com- 
panies are not required bv law to keep cash reserves, but 
as a rule they have large deposits in banks against which 
reserves must be held. Banks of the New York Clearing- 
House bear the brunt of holding the banking reserve of 
the country on account of their facilities in effecting ex- 
changes. The part of it which they hold for themselves 
and for other institutions is divided among rifty-six banks, 
nineteen of which do not belong to the national system, in 
substantial proportion to their resources. The reserves of 
these banks are ordinarily maintained above 25 per cent 
of deposits, and the strength of their condition is gauged 
by the surplus they hold in excess of the legal require- 
ment. While the banks are separately responsible, they 
act more or less in association or in concurrence in main- 
taining the reserve. The method of strengthening it is 
by curtailing loans either by advancing rates or being 
strict in the matter of security, which results in a certain 
amount of liquidation that reduces deposits and increases 
cash. In ordinary times there is more or less conflict of 
interest between keeping funds employed as close to the 
limit as practicable for the sake of the profit and main- 
taining a reserve that will beget general confidence in the 
security of the banks. 

When confidence is shaken and there is danger of 
panic, the conflict of interest may become acute. There 
may be a disposition, or even the necessity, on the part 
of some banks to curtail loans, refuse accommodation, and 
strengthen reserves, at just the time when that course 






THE BANKING RESERVE 167 

would increase alarm and when it is desirable to inspire 
confidence by meeting all legitimate demands and making 
a display of strength. At such critical times the Clearing- 
House Association has virtually " pooled " the reserves of 
its members by issuing certificates on a deposit of securi- 
ties and permitting the use of these in settling balances 
in the daily exchanges. This enables the individual banks 
to make fuller use of their cash in meeting the demands 
of customers and to extend accommodation as they other- 
wise could not. The association may go further and 
make actually a common fund of the aggregate reserves 
of all its members by assessing the stronger for the bene- 
fit of the w T eaker until the stress is over, when a re- 
adjustment will be made. The effect of this cooperation 
of banks in the use of their reserves is to allay panic 
and restore confidence, but there is in this emergency 
device a suggestion of weakness in the system of reserves, 
distributed as they are among many banks and yet in part 
concentrated upon one city as the financial center. The 
only safeguard is in a sagacious and conservative .manage- 
ment and the practise of accumulating larger reserves in 
New York than the law requires. 

In regard to reserves it is only fair to consider that 
cash on hand is not the only resource for meeting current 
demands. Strong banks keep a varying amount of their 
capital or surplus invested in " securities " that are read- 
ily marketable in case of an unusual demand. They may 
take advantage of low prices for such securities of a 
standard and paying character to increase their invest- 
ment, and may dispose of some at a profit when high 
prices prevail, but a legitimate purpose of such a fund is 
to have an available resource when reserves run low. A 
considerable line of safe demand-loans is also a resource 
that fortifies the reserve, as the money is to be had on notice 
or " call." If calling in loans does not greatly increase 



168 THE MODERN BANK 

" cash in hand/' it will reduce demand liabilities in the 
form of deposits. Trust companies depend largely upon 
their " call-loans " and bank-deposits to take the place of 
cash reserves in their own vaults. Banks organized under 
State laws are not subject to the same requirements as 
national banks, but in most, if not all, States there is a 
prescribed percentage of cash reserves to deposit liabilities. 
As a rule, these are not limited to " lawful money/' but 
may be made up to any extent of the notes of national 
banks. While national banks can not include bank-notes 
in their cash reserves, they may deduct them from the 
volume of deposits against which the reserves are held. 
These are " net deposits " and do not include uncollected 
items, and bank-notes represent sums due from the banks 
that issue them, while a bank's own notes in its own 
possession are not an outstanding liability. 



XXIII 



BOOKKEEPING OF THE BANK 



Bookkeeping is not ordinarily considered a subject of 
thrilling interest, though it is admitted to be important. 
An understanding of its ways and methods is generally 
left to accountants and people who are fond of figures. 
But there are features in the bookkeeping of a bank that 
take it out of the ordinary category of keeping accounts. 
We have seen how the clerks in each department are re- 
quired to keep a systematic and accurate record of all the 
transactions that pass through their hands, so that the 
least detail may be traced and verified. The tellers, who 
have to do with the receipt and payment of funds and the 
determining of the credits and debits of customers and 
those of the bank, besides keeping careful record of the 
various items with which they deal, are required to make 
" proofs " of their work each day and enter these in 
books. The purpose of this is to secure perfect accuracy 
and detect all possible errors by comparing one form of 
statement of the same details with another. A " settle- 
ment-book " is kept in which the aggregates of each 
day's transactions are brought together in such a way as 
to exhibit the condition of the bank's cash in the morn- 
ing, the receipts and payments through their departments 
during the day, and the state of the cash at night. 

With the details of making up these aggregates the 
bookkeeping department has nothing to do. It has charge 
of the ledgers that contain the final entries and permanent 

169 



170 THE MODERN BANK 

record of the day's business. Upon this department center 
all the lines of credit and debit reduced to their ultimate 
terms, but there are certain intermediate volumes in which 
the items are gathered from the various departments that 
deal with details, partly as a means of verification and of 
" proving " one against another in order to check errors, 
and partly as a reservoir from which the figures of the book- 
keepers may be drawn or with which they may be compared. 
These are known as " credit " and " debit " books. There 
is one ledger, however, that is posted in advance of these 
from the original items. This is the " balance ledger," 
the purpose of which is to exhibit promptly and constantly 
the state of each depositor's account, not merely at the end 
of the day but at all times during the day. 

In a large bank with many accounts one volume is not 
enough for the ledger in which the individual accounts are 
kept, and there may be several designated by the initial 
letters of the names covered by each, as the A-D ledger, 
the E-K ledger, the L-K ledger, and the S-Z ledger. The 
credit and debit books are divided to correspond to this 
classification, as the substance of their contents is to be 
embodied in the ledger volumes or used for comparison and 
verification of what they contain. Accounts are arranged 
in the alphabetical order of names, either strictly or on the 
vowel system, that is, according to the initial letter and first 
vowel, regardless of the consonants that may come between 
or after them. Some banks having a multitude of small 
accounts have separate ledgers for men and women depos- 
itors. The strict alphabetical arrangement is more con- 
venient where the names are very numerous, as the exact 
page of an account is more readily found by the index- 
letters that are placed on the upper corner of each left-hand 
page as the book is opened. Some large commercial banks 
with many out-of-town customers have a separate ledger 
for these called the " foreign individual ledger," as dis- 



BOOKKEEPING OF THE BANK 171 

tinguished from the " city individual ledger." There is 
also the ledger for accounts with other banks, and all of 
these are divided into two or more volumes according to 
the number of accounts to be contained in them, in order 
that a ledger may last as long as practicable before it is 
filled. 

The balance ledger is quite independent of the other 
books, except that it may be referred to for verification 
of entries. In this the names of depositors are entered 
in a list down the left-hand margin of the left-hand 
leaf, as the book lies open, and dated columns run 
across the two pages, usually covering the twelve business 
days of two weeks. The right-hand margin of the second 
leaf may be cut off so that when the leaf is turned the 
entries may continue across two more pages without en- 
tering the names again, as they will not then be covered 
by the leaf. This may be carried along for several weeks, 
but if there is a large number of depositors the list of 
names will have to be continued on several pages, and the 
book must be divided so as to receive them. The names 
may have to be reentered a number of times before the 
ledger is filled. The columns are double and ruled through 
the middle to separate debits from credits, the former be- 
ing entered to the left of the line and the latter to the 
right, the balance being kept on the credit side. Usually 
the debits from Clearing-House checks are entered in 
red ink to distinguish them from those that have a differ- 
ent source, as they constitute by far the larger part of the 
whole. 

In the morning the balance from the previous day is 
entered in the credit column and shows how much each 
depositor has then to his credit. As deposits come in the 
deposit-slips are sent from time to time to the balance- 
bookkeepers, and from these the fresh credits are entered 
at once. As fast as paid checks are ready for entry they 



172 THE MODERN BANK 

are similarly distributed and the debits are entered from 
them. These include such as are paid by the paying teller 
or drawn upon the bank and deposited with it, and those 
which come in much larger number from the Clearing- 
House after being deposited in other banks. The latter 
are taken in hand as speedily as they can be arranged for 
the different ledgers, and sometimes before the scrutiny 
of the check-clerks is completed. As collections from items 
not included in deposits come in from the note-teller they 
are entered as credits, and any payment or charge on 
account of depositors is entered as a debit. Credit-tickets 
for discounts or loans and other miscellaneous credits, and 
charge-tickets for interest or exchange or anything to be 
paid by the depositor, go to the balance-bookkeepers and the 
entries are completed daily, so that the state of the balance 
may be readily ascertained for the information of the 
paying teller or of any officer who may have occasion to 
ascertain it. The number of entries for any account will 
depend upon how " active " it is, and many of them may 
not change for days together. Spaces are left on the 
ledger pages for the insertion of new names as accounts 
are opened, and as one series of pages become filled another 
is begun, so that one thick volume may last for a consider- 
able period. 

In the " regular " credit-books all the credits to de- 
positors are written up each day from the deposit-slips, 
and in this case the name of the depositor as well as the 
amount deposited is written in each time. The names are 
divided according to the ledgers to which they belong and 
arranged alphabetically for the convenience of the book- 
keepers. The main purpose is to get a correct total, and 
to furnish the material for final entries and the means 
of proving the work of clerks and bookkeepers. In the 
regular debit-books are entered the debits on account of 
checks upon the bank paid by the first teller or received 






BOOKKEEPING OF THE BANK 173 

by the second teller ; but, on account of the number that 
come from the Clearing-House and the separate handling 
they are subject to, there is a separate " exchange debit " 
book. There are separate books also for " foreign " credits 
and debits, such as arise from collections out of town that 
have not been entered from deposits and regular charges. 

There are " supplementary " credit and debit books 
in which are gathered additional items for each side of 
the account. In the supplementary credit-book is entered 
the total of the credits from regular sources, already en- 
tered in detail in the other books, and to this total is add- 
ed separately those which come from whatever quarter 
through the note-teller, so as to make up a grand total of 
all the day's credits. In a similar manner the total of 
regular debits is entered in the " supplementary debit- 
book," and additional debits from whatever source are en- 
tered in detail and a grand total of debits for the day is 
thus obtained. As the supplementary credits and debits 
pass through the note-teller's department the results are 
exhibited in his proof, frequently made up twice a day. 
An example of his proof is given to illustrate what it 
includes. Some large banks have also what they call 
" general " credit and debit books, upon which all the 
items of the day are set forth in a systematic form, classi- 
fied according to sources, so as to exhibit all transactions 
on both sides of the account on a single page or two con- 
tiguous pages. Others enter the general items and bring 
together the totals in " foreign and general " credit and 
debit books. 

The final posting to the accounts of individual depos- 
itors is made in the " individual " or " deposit " ledger, 
which is divided, like the balance ledger and the credit 
and debit books, into two or more volumes according to 
the number of accounts, the divisions exactly correspond- 
ing for the different set of books. In this ledger the 



174 THE MODERN BANK 

accounts are arranged alphabetically, either strictly or by 
the initial and vowel system as mentioned above. The 
pages are turned backward from the upper left-hand 
corner, upon which appears the names of the depositors 
whose accounts are on the two pages laid open at any par- 
ticular place, so arranged as to indicate the position of 
each account. Thus with either the exact alphabetical or 
the vowel system it is easy to turn to any account. Each 
page may be divided down the middle by a double ruling, 
as the account does not require the full width, but some 
banks allow the full width of the page for the entries of a 
single account. The space allowed for an account is de- 
termined by an estimate of the number of entries likely 
to be required. While there may be several inactive ac- 
counts kept on one page, an " active account " — that is, one 
of a customer likely to make many deposits and draw 
many checks — may occupy several pages. Where there are 
many of the former a separate part of the ledger is re- 
served to them. In opening a new ledger a careful esti- 
mate is made of the number of pages to be allotted to each 
letter of the alphabet and the space to be given to each 
account, with a fair allowance of blank pages and spaces 
for new accounts to be inserted in their proper order and 
for those that may overrun the limits originally assigned 
to them. The purpose is to make the ledger last as long 
as possible without an unnecessary waste of space or de- 
rangement of the order of the accounts. It is considered 
desirable to have it cover at least a year. Some large 
banks make a point of opening new ledgers at the begin- 
ning of the year and closing them at the end, whether 
filled or not. Others open them at any time and run them 
as long as they will conveniently last. 

The division being made and the space for each being 
determined, the accounts are opened by entering the name 
of each depositor in its proper place and order on the page 



BOOKKEEPING OF THE BANK 175 

or in the perpendicular half page to which it is assigned. 
Under this heading are two sufficiently wide columns, 
the first for the debit charges and the second for credits, 
and at the left of each of these a narrow ruling for the 
date as each debit or credit is entered. Here the credits 
for any day may be entered directly from deposit-slips 
and credit-tickets, and the debits from paid checks and 
charge-tickets, or they may be transcribed from separate 
books in which they have already been entered by assistant 
clerks or tellers. The practise varies in different banks. 
The essential point is to have all the credits and debits ac- 
curately entered against the date to which they belong. 
It will be understood that a credit is the sum which a 
depositor has paid into the bank or which is to be credited 
to him, and that a debit is the sum which the bank has 
paid to or for him, or which is to be charged to him, and 
a balance is the difference between what he is owing the 
bank and what the bank is owing him, or what remains 
to his credit when the former is deducted from the latter, 
or vice versa. In some accounts entries of credits or debits, 
or both, may have to be made every day, while in others 
entries of one or the other are made only at irregular inter- 
nals. It depends upon the activity of the account, and that 
of course depends upon the circumstances of the customer. 
He may be a business man, or firm or corporation, ma- 
king frequent deposits, drawing many checks, and often 
having discounts or borrowing and paying on loans, or he 
may be a person that keeps a bank account only for con- 
venience in paying occasional bills. 

There is no separate column for a balance, but a 
balance is " struck " on the ledger whenever the depos- 
itor's pass-book comes in to be balanced. This is done 
in red ink, a line being drawn under the account, the 
debits and credits footed up, and the balance entered. It 
is at this point that the credit entries are made in the 



176 



THE MODERN BANK 



pass-book, corresponding to the debits of the ledger, unless 
they have been separately listed by the check-clerks or kept 
on a voucher-list, and in that case the aggregate is entered, 
with a reference to the list, which must accompany the 
vouchers to be returned. These include canceled checks 







Form of Account on Page of the Individual Ledger, as Balanced. 

and charge-tickets. The entries in the pass-book and those, 
in the ledger must be found to agree, and the pass-book 
and vouchers are left with the bookkeeper to be returned 
to the depositor on application, unless there is an informa- 
tion-clerk whose special duty it is to attend to the details 






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BOOKKEEPING OF THE BANK 177 

of balancing the pass-book, as described in a previous 
chapter. Only a few large banks make this the business 
of a separate " information bureau." 

Where there is a separate ledger for " foreign ac- 
counts/' or those of individual customers out of town, of 
which some banks in New York have a large number, it 
is kept in substantially the same way, though credits may 
be entered from remittance-letters instead of deposit-slips, 
or from books of original entry in the correspondence 
department. Whatever the detailed method, the purpose 
is the same of recording each day the credits and debits of 
the account as they then appear. The same is the case 
with banks which act as correspondents and for which the 
bank we are describing may act as an agent in its city — in 
short, for all banks that keep an account with it. This is 
called the " bank ledger." While the method of keeping 
it is substantially the same as that of keeping the indi- 
vidual ledgers, the accounts are arranged alphabetically by 
the names of the cities and towns in which the depositing 
or correspondent banks are situated. Whatever is due to 
them is entered as a credit when it becomes due, and what- 
ever is due from them is entered as a debit when it becomes 
due to the bank. The accounts are usually balanced at 
the end of each month, but this may be done at other times, 
according to circumstances. These accounts vary in size 
and importance according to the location of the corre- 
spondent and the character of its relations with the city 
bank, and are subject to a variety of agreements. Upon 
some of the deposits interest is allowed and credited to 
the account once a month on the average balance. When 
items are sent to a bank for collection the amounts are 
charged to it, and when remittances are received they are 
credited. Their charges for collection are also credited. 
The source of these entries is the books and remittance- 
letters of the correspondence department. It is custom- 



178 THE MODERN BANK 

ary to keep on a separate sheet an " account current," 
which is a duplicate of the running account in the ledger, 
to be sent at intervals to the correspondents or depositing 
banks. This exhibits the state of the account and the 
balance and corresponds to the pass-book of the individual 
depositor. 

There are banks which keep a double set of ledgers — 
complete duplicates — merely for the purpose of having one 
as a check upon the other, and to afford greater assurance 
against error or collusion. In such cases a comparison of 
all the accounts is made once a month. 

The ledgers thus far described pertain to the accounts 
of customers with the bank, including individual deposi- 
tors in the city and out, of all grades and classes, and banks 
that act as correspondents or keep funds on deposit in the 
city. They establish and record each day the credit and 
debit relations of these customers with the bank. This 
brings us to what, from the bank's point of view, is the 
most important book of all, the " General Ledger." This 
is a single ponderous volume, and in it is centered a 
record of all the bank's business from day to day. It is 
made up by the general bookkeeper, so as to exhibit each 
morning the completed transactions of the day before, 
and from it can be drawn at any time a statement of the 
bank's condition in all its departments, showing the aggre- 
gate items of its resources and liabilities and their rela- 
tion to each other. Most of its accounts contain no names 
of persons and no detailed items, but only aggregates of 
debits and credits and the balances on various accounts. 
These accounts differ somewhat in number and description 
with different banks, but they are so classified as to cover 
all its operations of whatever kind. 

There would be neither interest nor instruction in an 
attempt to deal with these in detail, but their general pur- 
port and purpose and the method of keeping them can be 



180 THE MODERN BANK 

indicated in a brief space. Among the accounts that per- 
tain to liabilities are those of capital, surplus, undivided 
profits, circulation, individual deposits, bank deposits, 
certified checks or acceptances, etc. Among those that 
relate to resources are bills discounted, demand-loans, 
time-loans, cash, stock and bonds, or securities, United 
States bonds, real estate, and so on. Separate accounts 
are kept of dividends, discount, interest, cashier's checks, 
certificates of deposit, bills of exchange, overdrafts, ex- 
penses, etc. The division and classification of accounts 
may differ according to the volume and variety of the 
business, but they must include every kind of transac- 
tion in which the bank is engaged in such a manner as 
to show under each head the credits and charges that belong 
to it and afford the material for a general statement of 
resources and liabilities, or a daily trial balance. There 
is a profit-and-loss account into which is gathered the 
final balances in such a way as to exhibit gains and losses 
and the ultimate balance. This is closed at the end of 
the year or of periods of six months, but it is kept up so 
as to admit of a statement of condition with respect to 
profit and loss at any time. 

Accounts in the general ledger differ widely in the 
number of entries that have to be made. A capital account, 
or surplus account, may be changed only at long intervals, 
when some increase or decrease is made by the authorized 
action of directors, while deposit accounts, loan accounts, 
and many others may require entries every day. The 
name of the account is written at the top of the page of 
the ledger and there is a narrow column for dates down 
the left-hand margin. The rest of the space is divided 
into two sides by a double ruling down the middle, that to 
the left being for debit entries, and that to the ri'ght for 
credits, though sometimes two opposite pages are used for 
an account, one being occupied exclusively for debits and 



BOOKKEEPING OF THE BANK 181 

debit balances and the other for credits and credit balances. 
Each space, whether a page or a perpendicular half page, 
is divided by a single ruling into two halves for the figures, 
the first for balances and the second for the debits or the 
credits, as the case may be, for the balance, whether of 
debit or of credit, is constantly kept up. The arrange- 
ment of the accounts in the book and the number of pages 
allotted to each is determined by convenience, and an in- 
dex is kept at the beginning of the ledger. 

It may be stated as a general principle that anything 
that goes to the assets or resources of the bank is charged to 
the proper account as a debit. It is due from the account to 
the bank. Whatever goes to its liabilities is credited to 
the account. It is due to the account from the bank. The 
sources of the items which the general bookkeeper posts in 
his ledger are various. He keeps a separate account for 
each of the individual deposit ledgers and each of the bank 
ledgers, and he has access to the credit and debit books 
for his items. It is he who brings together in the " gen- 
eral " credit and debit books the various aggregates that 
have been derived from original entries in the several de- 
partments. He ascertains the totals of credits and debits 
of each of the deposit ledgers, of the collections, of bills 
discounted, of loans, of cashier's transactions, and of all 
the rest that come within the purview of his duties in 
bringing into systematic order all the day's credits and 
debits as they are finally ascertained at the close of busi- 
ness. The clerks and tellers prepare each day the material 
for his postings and he deals only in aggregates. Upon 
a single line in each account to which anything is to be 
posted he enters against the date the aggregate of debits 
and credits belonging to it on that day's transactions, and 
the balance in its proper column. Thus he gathers into 
this receptacle of figures the results of each day's work 
so far as they are completed and made permanent. 



182 THE MODERN BANK 

The statement that general-ledger accounts deal only 
in aggregates to be entered in single sums for the day, 
without designation of persons or specific items, is subject 
to some qualification. It is true, for instance, of deposit- 
accounts and most others, but in the case of a loan-account 
it is common to charge each loan separately and designate 
it by the name of the borrower. So in the expense-account, 
the object of the expense or the bill for which it is charged 
may be indicated in the entry, and in crediting to the 
cashier-account the names of the persons for whom the 
bank's checks are drawn are designated. But where the 
totals come from the combination of many items only the 
aggregates are entered. The cash-account is an omni- 
um-gatherum for all the actual receipts and payments of 
the bank for each day. All that is taken in is credited to 
" cash," and all that is paid out is charged to " cash." The 
balance is always a " credit balance " ; otherwise the bank 
would be without funds available for use. There may be 
on a single day a deduction from the balance, but if the 
bank is in a flourishing condition there is about an even 
level of cash. It should be gaining in funds rather than 
losing, or should at least hold its own. On the other hand, 
the balances of deposit-accounts are constantly debit 
balances, or should be so ; otherwise the bank is paying 
back to depositors more than it is getting in from them, 
and a credit balance to the account would indicate that 
it had no deposits left and was in default to its depositors, 
or owing the account. 

Some banks that do a large business keep a separate 
" general balance ledger," in which is brought together on 
one broad page or two contiguous pages of the open 
book, an exhibit of the aggregate credits, debits, and bal- 
ances of all the accounts of the general ledger. This is 
made up by a different hand from the various sources, and 
so serves as a check and a " proof " upon the work of the 



BOOKKEEPING OF THE BANK 183 

general bookkeeper. Finally, there is a daily statement- 
book in which the titles of the several accounts of the gen- 
eral ledger are printed on the left-hand margin of the 
pages, classified on opposite pages as resources and liabili- 
ties, or this may be done on the perpendicular halves of a 
single page divided down the middle. Here the aggregate 
balances as finally determined are entered in a way to 
show the condition of the bank. Upon the page or half 
page for assets, for instance, appear the amount of the 
bank's cash, with the reserve separately stated, of various 
kinds of loans and discounts outstanding, of securities 
owned, of sums due from other banks, and so on through- 
out the list. Upon the page or half page of liabilities is 
the amount of capital, of surplus, of undivided profits, 
of circulation outstanding, individual deposits, amount due 
to other banks, certificates of deposit, cashier's checks, etc. 
This book enables the officers to ascertain readily the con- 
dition of the various accounts, and serves as a guide in ma- 
king loans and engaging in other new transactions. It also 
furnishes the material for making up the statements for 
the Clearing-House and the reports of condition to the 
Comptroller of the Currency or to the State Bank Com- 
missioner or Superintendent. It is in the nature of a 
daily trial balance. A " general proof " is made up every 
night by the bookkeeper, giving the grand totals of cash 
and of the day's debits and credits. This is sometimes 
called a " teller's proof." 

Clearing-House banks in New York keep a book of 
" daily averages " of those items that enter into the weekly 
statement required by the Clearing-House. These items 
being made up for each of the six days, it is an easy matter 
to obtain the daily average of each on Saturday morning. 

In many banks which have a very large number of 
depositors and a great volume of business widely dis- 
tributed a still further condensation is made of the state- 



184 THE MODERN BANK 

merit of condition in a smaller book labeled " Teller's 
Proof/' which exhibits each morning in small compass the 
essential items of resources and liabilities, showing the 
amount of the bank's cash and the state of its reserve, the 
volume of deposits, the amount of loans and discounts out- 
standing, including that which is subject to call separately 
stated, etc. This enables the chief officer, who will have to 
decide upon new applications for accommodation, to know 
approximately what resources he has at command. There 
is an element of estimate in this, and it may be subject to 
correction before noon. For instance, he can not tell until 
after the Clearing-House exchanges have been made 
whether the cash is to be drawn upon for the payment of 
a debit balance or will be increased by a credit balance. 
The result of the Clearing-House settlement may change his 
calculations. He must consider the question of maintain- 
ing the percentage of reserve, and may find it advisable to 
call in certain demand-loans to replenish his funds and 
keep up the reserve. 

Apart from what may be regarded as the daily system 
or routine of the bank's work, an alert and careful presi- 
dent has a variety of statements prepared from time to 
time. One of these is a detailed statement of expenses. The 
general bookkeeper, as he posts from day to day the bills 
for expenses in his expense-account, keeps a classified state- 
ment of the several amounts and the purposes for which 
payments are made. At the end of the month he puts this 
in completed form, making a comparison with the cor- 
responding month of the previous year. He makes a simi- 
lar comparison for the part of the calendar that has 
elapsed, so that it is easy to see how the expenses for vari- 
ous purposes have been running, and whether they have 
increased or diminished as a whole or in any particular 
direction. Similar statements of earnings from various 
sources are kept up so that the course of the income can 



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BOOKKEEPING OF THE BANK 185 

be readily traced. The value of such statements to the 
responsible officers is apparent. A watchful officer fre- 
quently has tables of statistics prepared under his own eye 
relating to a variety of matters that more or less concern 
the banking business, such as the course of the market 
prices of the principal stocks and bonds dealt in or used as 
security for loans, the volume of mercantile business and 
its variations, the earnings of railroads and large indus- 
trial interests, and so on. There is hardly a limit to the 
practical, industrial, commercial, and financial informa- 
tion which it is useful for a bank to have at its command 
in systematic form for the purpose of study and reference. 



XXIV 

EXAMINATIONS, STATEMENTS, AND REPORTS 

Notwithstanding the thoroughness and care with 
which all records and accounts are kept in a well-managed 
bank, and the number of statements that are prepared to 
show the course and condition of its business, it is sub- 
ject to a variety of examinations, as a precaution against 
inaccuracy, negligence, and possible collusion and dishon- 
esty. In the first place, there is a system of internal exam- 
inations by committees made up by the officers from the 
clerical force. These are applied unexpectedly and simul- 
taneously to all those departments in which funds are 
handled and debits and credits are determined and 
recorded, as those of the tellers and the collection, dis- 
count, and loan clerks, and the committees are made up 
of those who have no part or responsibility in the work 
to be scrutinized. At the close of banking hours on some 
day that can not be anticipated the head of each of these 
departments finds his work suddenly taken out of his 
hands by one of these committees, which goes carefully 
and thoroughly through the books and records of the de- 
partment, its " proofs," and all the methods and details 
of its work, to ascertain how efficiently and faithfully it 
has been and is being done. Hours are spent in hunting 
for faults, errors, and defects, and a careful and confi- 
dential report is made upon the investigation. This may 
be done two or three times a year, or oftener if there is 
deemed to be occasion for it, and it naturally keeps the 
186 






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EXAMINATIONS, STATEMENTS, AND REPORTS 187 

tellers and clerks of these departments constantly on their 
guard and up to their work. Another practise is that of 
suddenly shifting the bookkeepers at irregular intervals 
from one division of the ledgers to another, instead of keep- 
ing the same men permanently at the same books. 

Besides the internal examinations made under the di- 
rection of the officers by committees chosen from em- 
ployees of the bank, there are occasional examinations of 
the work and methods of all departments and the general 
condition of affairs by an outside committee of experts 
selected by the directors, which even the officers can not 
anticipate. This committee makes its appearance upon 
the scene suddenly some day after banking hours and takes 
possession. Everything is put at its command, and every- 
body is subject to its orders for the time being. It is made 
up of experienced banking men who have no concern with 
the institution under examination, and it subjects the 
affairs of that institution to a rigid scrutiny in detail, and 
prepares a report to be laid before the Board of Directors, 
with such suggestions as it finds occasion to make. These 
unofficial examiners are paid by the bank, and the salaried 
clerks who serve on the committees previously mentioned 
receive extra pay for this service, which also gives them 
an opportunity to justify the confidence reposed in them. 

Finally, there are the official examinations, which even 
the directors can not anticipate. They know that they 
are liable to come, but they never know when they are com- 
ing. The Comptroller of the Currency has a board of 
examiners for national banks, who are, or at all events 
should be, competent experts, and he assigns them from 
time to time to the task of examining certain designated 
banks, passing from one to another at irregular intervals. 
The Superintendent of Banking, or whatever officer may 
be vested with the supervision of banks under State laws, 
is provided with a similar force of examiners for State 



188 THE MODERN BANK 

banks and other financial institutions under State control. 
The official examiner is liable to make his appearance at 
any time in any bank, and on showing his credentials he is 
entitled to every facility and cooperation in looking into 
its affairs. He can go over its books and accounts, inquire 
closely into its methods, count up its cash, examine into 
its discounts and loans, scrutinize its securities and its in- 
vestments, and make himself acquainted with every detail 
of its business and its condition. The thoroughness with 
which this is done may depend upon the competence and 
fidelity of the examiner and the circumstances of each 
case, but the purpose is to ascertain whether the bank is 
properly managed and in a sound condition. The head of 
the banking department of the State or the National 
Comptroller of the Currency must depend mainly upon 
the reports of his examiners for making effective his super- 
vision of the system under his charge. 

The Clearing-House statement mentioned in the last 
chapter is required not only from members of the asso- 
ciation, but from the institutions that clear their checks 
through any of the members. The statement must be sent 
in before eleven o'clock on Saturday for the six preceding 
business days, giving the daily average of loans and dis- 
counts, specie, legal tenders, deposits, and circulation. The 
aggregate for all the associated banks is immediately made 
up at the Clearing-House and given out for publication in 
the newspapers, and is always looked for with interest as 
indicating the relation of the reserves to deposits. This, 
taken with the volume of loans outstanding, is an index 
of the condition of the money market. If the reserves are 
close to the legal limit, or below it, this is regarded as a sign 
of actual or impending stringency and a probable advance 
of rates for money, whereas if there is a liberal margin of 
surplus it is a token of ease and possible dulness. As the 
statement is for daily averages it is not an exact indication 



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EXAMINATIONS, STATEMENTS, AND REPORTS 189 

of condition at the end of the week, since the amounts may 
have been rising or falling during the week. In the general 

182443 



COPY OF STATEMENT 




z£ 



c 



ending the.. 



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c&, 



..day ol 




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-for week 
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as required by Section 16 of the Constitution of the New York Clearing 
House Association. 



Average amount of Loans and Discounts, 


/ / 


4*73 


6>J 6> 


Average amount of Specie, 


& 


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Average amount of Legal Tender Notes, - 




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Average amount of Deposits, other than U. S., 


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Average amount of United States Deposits, 









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a 





Please send a copy of the Weekly Statement of your Bank to the 
Clearing House before •// o'clock A. M. on each and every Saturday. 

WILLIAM SHERER, Manager. 



Correct.. 



Form of Statement of Clearing-House Bank as Filled Out. 

Clearing-House statement the increase or decrease for the 
various items and for the total reserve is noted. A state- 
ment for all the banks in detail, as well as the aggregate for 






190 THE MODERN BANK 

the association, is published every week, in which the 
capital and surplus, as well as the other items, are given 
and the percentage of reserve is noted for each bank. To 
this is added the volume of clearings and the amount of 
balances settled for the week, as compared with the previ- 
ous week. A separate statement is published for the non- 
member banks of the city. Examples of these statements 
for a recent date are here presented by way of illustration ; 
these are for the associated banks of New York and the 
non-member banks, but similar statements are required 
by clearing-houses in other cities. 

National banks are not only subject to examination 
by an official examiner appointed by the Comptroller, 
whenever the latter may see fit to direct it to be made, but 
the Comptroller is required by law to call for a report of 
condition at least five times a year. He issues his call 
from Washington, fixing a date for which all reports are 
to be made of the condition of the bank " at the close of 
business " on that day, and requiring them to be forwarded 
to his office " immediately." There is a penalty of $100 
for every day's delay beyond five days from the receipt of 
the notice. Two copies of a blank form are furnished to 
each bank to fill out, one of which it may file for its own 
use. This consists of two pages of a broad sheet, one for 
a statement of resources and the other for liabilities. There 
are twenty items in each of these lists. Those on the side 
of resources are " loans and discounts," subdivided into 
those on which officers and directors are liable as payers 
or indorsers and those on which they are not so liable; 
" overdrafts," secured and unsecured separately stated ; 
" United States bonds to secure circulation " (par value), 
the amount of each class being stated ; " United States 
bonds to secure United States deposits " ; " United States 
bonds on hand " ; " premium on bonds," stated separately 
for those to secure circulation and others ; " stocks, securi- 



EXAMINATIONS, STATEMENTS, AND REPORTS 191 

ties, etc., including premium on same " ; " banking-house 
furniture and fixtures/' value separately stated ; " other 
real estate owned " ; " due from national banks (not ap- 
proved reserve agents)"; "due from State and private 
banks and bankers, trust companies, and savings-banks " ; 
" due from approved reserve agents " ; " internal-revenue 
stamps " ; " checks and other cash items " ; " exchanges 
for Clearing-House"; "bills of other national banks"; 
" fractional paper currency, nickels, and cents " ; " lawful 
money reserve in bank," classified in gold coin and certifi- 
cates, silver coin and certificates, fractional silver coin, and 
legal-tender notes; "redemption fund with United States 
Treasurer (not more than 5 per cent on circulation)"; and 
" due from United States Treasurer." The amount of 
each of these items is to be entered, no spaces being left 
vacant, but the word " none " being written in where there 
is no such amount, and the total footed up. 

The items in the list of liabilities are: Capital stock 
paid in " ; " surplus fund " ; " undivided profits," in- 
cluding amounts, if any, set aside for special purposes, 
less current expenses and taxes paid ; " circulating notes 
secured by United States bonds, less amount on hand 
and in Treasury for redemption or in transit " (the latter 
amount being separately stated) ; " due to national banks 
(not approved reserve agents)"; " due to State banks and 
private bankers " ; " due to trust companies and savings- 
banks " ; " due to approved reserve agents " ; " dividends 
unpaid " ; " individual deposits subject to check " ; " de- 
mand certificates of deposit " ; " time certificates of de- 
posits " ; " certified checks " ; " cashier's checks outstand- 
ing " ; " United States deposits " ; " deposits of United 
States disbursing officers " ; " notes and bills redis- 
counted " ; " bills payable, including certificates of deposit 
representing money borrowed " ; and " liabilities other 
than those stated above." As in the case of resources, an 



192 THE MODERN BANK 

entry must be made for each item and the total footed up. 
The two sides of the statement should balance, as showing 
the exact condition of the bank on the prescribed date. 

On the back of the statement are a number of blank 
schedules in which details of some of the items must be 
set forth. These include, on the side of resources, loans 
and discounts, presenting the different classes of dis- 
counted paper and loans on security; overdrafts, the se- 
cured and unsecured separately, classified as " standing 
twelve months or over," " standing six months or over/' 
" temporary/' and " officers and directors " ; stocks, se- 
curities, etc., entered by name and value, with amount at 
which carried on books and estimated market value; 
" other real estate owned/' with details of property and 
value, date of acquiring, and whether taken for debts 
previously contracted ; checks and cash items other than 
exchange for Clearing-House, stating separately checks and 
drafts on city banks not members and those on other 
banks. Other schedules are for average percentage of 
reserve to deposits for thirty days and rate of interest 
paid on deposits and on bills rediscounted and bills pay- 
able, certificates of deposit representing money borrowed; 
loans exceeding the prescribed limit, including amounts 
due from banks and bankers and overdrafts ; balances due 
from or to approved reserve agents with name and location 
of each bank and the amount in each case, and liabilities 
of different officers and directors, as payers, as indorsers, 
and for overdrafts, with number of shares in the bank 
owned by each. 

This report of condition has to be sworn to by the pres- 
ident or cashier and attested by three directors before a 
notary public or other officer commissioned to administer 
oaths. The substance of each report, containing all the 
items of resources and liabilities in condensed form, must 
be published in a newspaper in the place where the bank 



EXAMINATIONS, STATEMENTS, AND REPORTS 193 

is located, or, if there is none in that place, in the nearest 
one in the same county. A copy of this, cut from the news- 
paper, must be sent to the Comptroller's office pasted upon 
the form furnished for this published report and accom- 
panied by a statement of the fact of publication sworn to 
by the publisher. A compilation from these reports for 
the whole country is made in the Comptroller's office and 
furnished to any newspaper correspondent who may de- 
sire it, that the utmost publicity may be given to the con- 
dition of the national banks. Five times a year it is pos- 
sible to know accurately how many of these banks there 
are, not only in the country but in each State and each city 
and town where there is any, the amount of their capital, 
and their resources and liabilities in their various forms. 
Apart from the occasional publication of the important 
facts in the newspapers, full and detailed information is 
given every year in the Comptroller's official report to 
Congress. 

Besides the report on condition, every national bank 
has to make a semiannual report to the Comptroller of its 
earnings and dividends. A form is supplied for this, di- 
vided into three sections. In the first is entered on one 
side the gross earnings of the period and any losses re- 
covered since the previous reports, and on the other pre- 
miums on United States bonds charged off, losses from 
bad debts, decrease of values or otherwise, expenses and 
taxes, and net earnings for the six months. These two 
sides should balance. In the second section must be en- 
tered on one side the net earnings brought down from the 
first section, undivided profits or loss, brought forward 
from the previous report, any amount withdrawn from 
surplus since the previous report, any authorized reduction 
of capital to meet loss or add to profit, any assessment paid 
on capital, and any amount subscribed and paid by share- 
holders as surplus or profits; and on the other side any 



194 THE MODERN BANK 

sum carried to surplus fund during the half year, amount 
of dividends paid, with rate, and net profits undivided, or 
loss, as the case may be. This is complete for the six 
months' period, but a third section must be filled out show- 
ing on one side the total profits since organization as a 
national bank, profits and surplus of old organization at 
time of conversion, if any, and total paid in by share- 
holders and reductions of capital to meet losses and passed 
to profits ; and on the other side total surplus at date of 
the report, total dividends paid since organization, and 
amount of present undivided profits, or of loss, to 
be carried forward to the next report. If no dividend has 
been paid, the report must be made to show earnings and 
the disposition made of them. The report must be sworn 
to by the cashier as a true statement to the best of his 
knowledge and belief. 

The semiannual report on circulation outstanding is 
made to the Treasurer of the United States for the pur- 
pose of having the " duty/' or tax, levied thereon. A 
blank is furnished by the Treasurer with full instructions 
as to the manner of computing the average circulation 
for the six months. The amount for each day is to be 
recorded, and when the report is made these sums are 
added together and the aggregate is divided by the number 
of days, the tax not being levied upon the authorized or 
issued circulation, but the " average outstanding." The 
bank is entitled to deduct the amounts with the Treasurer 
for redemption and reissue, or in its own hands for re- 
issue, but sometimes the return is made for the full issue. 
The form of report is simple, the amount of notes received 
from the Comptroller of the Currency being entered, the 
amount in circulation based upon 2-per-cent consols of 
1900, with the amount of tax at J of 1 per cent, and 
the amount based on " any or all other United States 
bonds," with the tax at ^ of 1 per cent. It must be sworn 






EXAMINATIONS, STATEMENTS, AND REPORTS 195 

to as a true statement by the cashier, and the payment of 
the tax is usually made to the Treasurer on the return of 
the report. A bank having circulation outstanding less 
than half a year at the time of the report, which must be 
made within ten days of the 1st day of July and January, 
divides the aggregate for the time the notes are outstand- 
ing by the number of days in the half-year to ascertain 
the " average " subject to the tax. 

Where there are State banks, reports of condition 
somewhat similar to those of the national banks, but usually 
with less detail, are required, to be called for by the author- 
ity entrusted with the execution of the banking laws of the 
State. In New York the call is made four times a year. 
It is intended in both cases that there shall be no oppor- 
tunity to make preparation for these reports. In New 
York and some other States the official supervision of 
banks includes trust companies and savings-banks. 

While it may not be easy to grasp all these details as 
to examinations, statements, and reports, they are given 
here, like those relating to the work of tellers, clerks, and 
bookkeepers, in the hope of producing an adequate impres- 
sion of the care and thoroughness required in the operation 
of a bank. 



14 



XXV 

CLERICAL FORCE AND LINES OF ADVANCEMENT 

After having gone over the ground of the work of a 
large and active bank in an important financial center, it 
will be easy to understand that the service requires a con- 
siderable clerical force in which there will naturally be 
gradations and lines of advancement. It is unnecessary 
to dwell upon the qualities, desirable in this kind of work. 
There can not be too much intelligence and general mental 
training, but special taste and aptitude and a readiness 
to study the business are eminently desirable. Nowhere 
does more depend upon confidence ; and the commonplace 
virtues of honesty, industry, fidelity, and loyalty are indis- 
pensable to success. In no business is there likely to be 
stricter inquiry into the character and qualifications of 
those employed or a more vigilant supervision over their 
habits. At the same time every one who holds a position 
of any degree of trust or responsibility will be put under 
bonds. In these days there are corporations that make a 
business of giving bonds, which are generally acceptable, 
though first-class personal bonds of men of standing and 
known integrity are preferred. 

There are in most banks a number of employees, like 
janitors, porters, and watchmen, who are hardly the ma- 
terial for advancement to higher places, and may spend 
the better part of their lives in these humbler places. It 
is not common nowadays in the larger city banks to call 
those messengers who are sent out to make collections or 
196 



CLERICAL FORCE AND LINES OF ADVANCEMENT 197 

exercise discretion in carrying out instructions in dealing 
with customers or with other banks. Messengers, rather, 
are trusty men who are sent on ordinary errands or to 
accompany clerks upon duties that require incidental help, 
though the term is still applied in many banks to the young 
men who act as collectors. 

These latter present notes and drafts and make collec- 
tions, and here is the first step in learning the practical 
w T ork of banking, and the beginning is usually made in the 
collection department or that of the note-teller. The col- 
lector gradually becomes familiar with the details of that 
department, and his next step is likely to be that of an 
assistant to the clerk; or if there is need of an assistant to 
the mail-teller, the corresponding clerk, or the exchange- 
teller, he may be chosen to fill the vacancy. The advance- 
ment is likely to be through the lower grades of those 
departments in the order named. As a variety of experi- 
ence is desirable, there is more likely to be such transfers 
than a waiting for promotion in the same department. 
There may, however, be more than one assistant in a de- 
partment, and if a first assistant is transferred his place 
will be taken by the next in line. Much will depend upon 
where vacancies happen and upon the special aptitude dis- 
played by persons selected to fill them, as well as experience 
or seniority in service. Next to the assistants to clerks 
come those to the regular tellers and the bookkeepers. The 
line of advancement for assistant tellers is likely to be first 
to that of the note-teller, then the receiving teller, and 
finally the paying teller. A young man who once enters the 
bookkeeper's department is less likely to be transferred on 
account of the peculiar character of the duties, requiring a 
special kind of expertness; but there are exceptions, for 
a good bookkeeper may be highly qualified for a teller's 
place just when a competent man is wanted. 

When it gets beyond the grade of assistants the service 



198 THE MODERN BANK 

becomes more stable, but changes will come in the best- 
regulated banks. A vacancy may be filled by an experi- 
enced and highly recommended person seeking a place from 
the outside, but the rule is one of promotion from the 
ranks of the most trusted subordinates. The first head of a 
department likely to be reached is that of collection-clerk 
or coupon-clerk, and the next step in promotion will be 
to the position of corresponding-clerk. After him come 
in order the discount-clerk and loan-clerk. The distinc- 
tion between clerks and tellers is largely one of name, but 
some remnant of the etymological significance of the words 
'remains. A clerk is a writer and a teller is a counter, and 
the latter has more direct responsibility in handling funds. 
The mail-teller receives and accounts for those that come 
through the post-office, but his duties are subsidiary to 
those of the note-teller, who has immediate charge of the 
proceeds of all collections. The relation of the exchange- 
teller who takes charge of the checks that are settled 
through the Clearing-House is rather with the bookkeepers 
than with those who handle the cash, and he ranks below 
the note-teller. The three principal tellers are the note- 
teller, the receiving teller, and the paying teller, and the 
line of promotion above the clerkships is through these. 

It has been mentipned that the cashier is the chief 
executive officer in command of this force, but with the 
increase of his duties and the necessity of one or more 
assistant cashiers, he now has in the largest banks a repre- 
sentative in immediate charge of the clerical force in the 
person of the chief clerk. The latter is usually a man who 
has risen through the ranks and passed the various impor- 
tant grades of the service, and is therefore familiar with all 
the duties. He is able to relieve the cashier of a multitude 
of details in the supervision of the routine work, assigning 
subordinates to duty here and there where they are needed, 
seeing that every point is covered, answering questions, 



CLERICAL FORCE AND LINES OF ADVANCEMENT 199 

giving directions, and supplementing the work by his own 
hand wherever necessary. He is the real superintendent 
of the work of clerks and tellers and the connecting link 
between the rank and file of the force and the officers of 
the bank. It is assumed here that the institution is sys- 
tematically managed with sole reference to its efficiency 
as a great business agency, having well-defined obligations 
and responsibilities, and that in the employments and pro- 
motions " merit and fitness/' and not favoritism or " pull," 
are determining factors. This is doubtless the case with 
the largest and most successful institutions, but this does 
not imply that personal choice or influence are without 
effect. The purpose has been merely to give an idea of the 
gradations of the service and the normal lines of advance- 
ment. In smaller banks the system is naturally simpler 
and more flexible, and the relations between officers and 
employees are closer. There are fewer clerks and may 
be no assistants, and departments may be blended together, 
but from the complex it is easy to infer the methods of 
the simpler. 

The plan of gradation and promotion described above 
is not that of all banks, and there is no uniform system. 
Variation may be determined by the character and extent 
of the bank's business, which affects the relative impor- 
tance of departments. It is the custom of some banks to 
admit new men to their service only at the bottom, taking 
them in young as messengers or collectors, who after their 
morning work act as assistants to the check-clerks. They 
are liable to be assigned to minor duties in any depart- 
ment where additional assistance is needed, until they 
become familiar with a variety of work and have a chance 
to display their aptitudes and qualities. Their advance- 
ment will then depend upon the openings that are made 
by an increase of business or the dropping out of old em- 
ployees, leading to promotion or a shifting of the force. 



XXVI 

BANKS THAT FAIL 

The National Bank Act makes provision for both vol- 
untary and involuntary liquidation of banks belonging to 
the system, and more than 400 have been placed in the 
hands of receivers and had their affairs wound up since 
the act took effect. If a bank proves to be unprofitable 
and its continuance is considered undesirable, it may go 
into voluntary liquidation on a vote of the owners of two- 
thirds of the shares, notice of the fact being certified under 
its seal by the president or cashier to the Comptroller of 
the Currency. Notice must then be published for two 
months in a newspaper in New York and in one where 
the bank is situated, calling upon noteholders and cred- 
itors to present their claims for payment. Within six 
months of the time of the vote " lawful money " must be 
deposited with the Treasurer of the United States for the. 
redemption of all notes outstanding, and the bonds depos- 
ited for security will be reassigned to the association. In 
case of failure to make the deposit the bonds will be sold 
to redeem the notes and cover the expense of the proceed- 
ing, and any balance will be turned over to the legal repre- 
sentatives of the bank. If a bank fails to renew its cer- 
tificate of association under a provision for extending 
charters when the limit has expired, it is required to 
wind up its affairs and settle the claims of creditors in 
the same manner. 

The Comptroller may put a bank in the hands of a 
200 






BANKS THAT FAIL 201 

receiver and have its affairs wound up for any one of 
several reasons. One is the very exceptional case of refus- 
ing to redeem its circulating notes on demand. In such a 
case there must be a formal protest of the notes by a notary 
and notice to the Comptroller, who, with the concurrence 
of the Secretary of the Treasury, may appoint a special 
agent to ascertain whether the bank persists in refusing to 
pay its notes. If so, he shall within thirty days declare 
its bonds forfeited, suspend its right to prosecute its busi- 
ness, and call upon holders of its notes to present them 
at the Treasury of the United States for payment in law T - 
ful money. As they are paid, the bonds held for security 
may be canceled, or they may be sold at auction or private 
sale, and if not enough is realized to redeem all the notes 
the Government will have a paramount lien upon assets 
to reimburse it for the rest. A receiver will be appointed 
to take possession of the books and records and all the 
assets of the association, collect all debts and claims, and 
upon order of a competent court to compound bad or doubt- 
ful debts, sell property, and, if necessary in order to pay all 
debts of the association, enforce the individual liability 
of stockholders. The moneys collected are paid over to 
the Treasurer of the United States subject to the order 
of the Comptroller of the Currency, to whom a report of 
the proceedings must be made. 

A receiver may in like manner be appointed, the fran- 
chise of the bank forfeited and its affairs wound up, when- 
ever a creditor shall obtain judgment against it in any 
court of record and shall make application for the appoint- 
ment, accompanied by a certificate of the clerk of the 
court that such judgment has been rendered and has re- 
mained unsatisfied for thirty days, or when the Comp- 
troller shall become satisfied of its insolvency after due 
examination of its condition. Proceedings for the same 
purpose may be taken for certain violations of law, viz., 



202 THE MODERN BANK 

failure to have the capital stock fully paid up or to make 
good any deficiency in legal reserve after a notice of thirty 
days ; purchase by the bank of its own stock, except to 
prevent loss upon a debt contracted in good faith, and 
failure to dispose of the same within six months when so 
purchased ; failure to make good any impairment of capi- 
tal and refusal to go into liquidation within three months 
after notice; and false certification of checks. Suit may 
be brought by the Comptroller for forfeiture of charter 
if the directors of any national banking association " shall 
knowingly violate, or knowingly permit any of the officers, 
agents, or servants of the association " to violate, any pro- 
visions of the law. In such cases the directors participa- 
ting in or assenting to the violation are held personally and 
individually responsible for any loss or damage to the 
association, its shareholders, or any other person, in con- 
sequence of the illegal act. 

Provision is made for notice to creditors, in case of 
a receivership, to present their claims, and for a ratable 
distribution of assets. If all claims of creditors are satis- 
fied and expenses paid, the residue is to be distributed 
among shareholders in proportion to the stock held by 
them. After the redemption of notes has been provided 
for, the claims of creditors satisfied, and the expense of 
the receivership met, the Comptroller of the Currency is 
required to call a meeting of the shareholders, giving 
thirty days' notice by publication in a newspaper where 
the bank is situated, at which they may decide by a ma- 
jority vote that the receiver shall continue and wind up 
their affairs, or may choose an agent of their own to com- 
plete the process. In the latter case, on the execution of 
a bond to the Comptroller for the faithful performance 
of all the duties of the trust, that officer and his receiver 
will make an assignment and transfer of the undivided or 
uncollected assets and be discharged from all liabilities. 



BANKS THAT FAIL 203 

but the powers and duties of the agent are fully prescribed 
in the law. The aggregate liabilities of 406 national banks 
placed in the hands of receivers from the first case, April 
6, 1865, to October 31, 1902, amounted to $186,731,459, 
and the amount of claims settled was $144,272,471. There 
has never been any loss on the circulating notes. 

The method of winding up the affairs of a State bank 
are not materially different, but the causes of forfeiture 
of charter and manner of determining insolvency vary in 
different States. Proceedings are usually instituted under 
State laws by some officer having supervision of banking, 
after an examination and by application to a court of 
competent jurisdiction. 



XXVII 

CLEARING-HOUSE AND OTHER ASSOCIATIONS X 

Under the provisions of the National Bank Act no 
" banking association " can have more than one place of 
business, and as a consequence no branches or outside 
agencies can be established. The result is a large number 
of independent banks, and no provision is made for their 
association together for any common purpose. This has 
led to voluntary associations in different cities under con- 
stitutions and by-laws of their own, and to a number of 
State Bankers' Associations and an American Bankers' 
Association, which comprise national and State banks and 
hold annual conventions for the consideration of subjects 
of common interest. A few States permit the establish- 
ment of branches by institutions organized under their own 
laws, and in ~New York the privilege is given to State 
banks in New York city alone, but what is known as 
branch banking is practised to only a limited extent in this 
country, and there has been no concentration of resources 
in a few great central institutions. 

The first associations were formed for the one purpose 
of maintaining clearing-houses for the exchange of checks 
and other items deposited at one bank and payable at 
another. This process has been sufficiently described in a 
previous chapter, but clearing-house associations have come 

1 For a history of clearing-houses and a full account of their methods 
in this and other countries, the reader is referred to Mr. James G. Can- 
non's excellent work on Clearing-Houses, published by D. Appleton &Co, 
204 



CLEARING-HOUSE AND OTHER ASSOCIATIONS 205 

to have other purposes, and that in New York has become 
an important agency in the banking business of the chief 
financial center of the United States. It was first formed 
in 1853, for the primary purpose of effecting the exchanges 
above referred to, and occupied rented premises in Wall 
Street. At first there were about fifty of the old State 
banks in the association and the daily volume of ex- 
changes was little more than $20,000,000. A constitu- 
tion was adopted in 1854, and in 1858 more commodious 
quarters were occupied in the building of the Bank of New 
York in Wall Street. During the civil war the banks in 
this association were of essential service to the Government 
in floating its loans and in cooperating in the establish- 
ment of the national bank system, although they did not 
all reorganize under it. The Bank of Commerce of New 
York was then the only banking institution in the United 
States having a capital of $5,000,000, and it was induced 
to enter the system by being relieved of the double liability 
of stockholders imposed upon all others. 

Later the association raised a building fund and ac- 
quired a bank building at the corner of Pine and Nassau 
Streets which it adapted to its use. This it occupied from 
1875 to 1896, when it took possession of the fine building 
especially constructed for it in Cedar Street at a cost of 
over a million dollars. The membership has changed in 
the course of years, as old members have dropped out and 
new ones have been taken in. Each new member took a 
number at the foot of the list and the places vacated were 
not filled, so that now, though the numbers run up to 
ninety-five, there are only fifty-six members, of which 
thirty-seven are national and nineteen State banks. The 
daily exchanges frequently exceed $250,000,000, being 
largely in excess of those of all the other clearing-houses in 
the country. The organization has meanwhile undergone 
various changes and its functions have been extended. It 



206 THE MODERN BANK 

holds an annual meeting in October, at which a president, 
vice-president, secretary, and treasurer are elected and a 
number of committees are constituted. 

The officers have the duties implied in their titles, and 
the most important committee is known as the Clearing- 
House Committee. It has under the constitution the prac- 
tical direction of the affairs of the association, and holds 
regular monthly meetings and special meetings from time 
to time. There is a Conference Committee, chosen to co- 
operate with the Clearing-House Committee in emergencies 
or on special occasions; an Arbitration Committqe for the 
adjustment of any differences that may arise between mem- 
bers; a Nominating Committee to propose candidates for 
office to be voted upon at the annual meeting; and a Com- 
mittee on Admissions to which applications for member- 
ship are referred by the Clearing-House Committee, to 
which such applications must be made in the first instance. 
New members may be admitted by a vote of three-fourths 
of the existing members at any annual meeting. 

There is an initiation fee of $5,000 for any bank not 
having a capital of $5,000,000 or more, and for any such 
bank it is $7,500. The annual expenses are apportioned 
among the members according to the average amount of 
their exchanges. The practical management of the Clear- 
ing-House is in the hands of a paid manager under the direc- 
tion of the Clearing-House Committee, and he has an assist- 
ant and a force of clerks. There is a regular system of 
records and bookkeeping. The manager is charged with the 
enforcement of the rules applying to the internal adminis- 
tration of the Clearing-House, and lias the power to impose 
fines for their violation, which are charged to the banks 
whose employees are delinquent in any of the duties con- 
nected with the daily process of clearing. 

There are in New York and the immediate vicinity 
forty-one banks and a number of trust companies that are 



CLEARING HOUSE A.ND OTHEB associations 4 207 

allowed the privilege of clearing through members of 
the association. This privilege of "non-members" be 
gan to be allowed early in the history of the Clearing 
House, but gradually restrictions and requirements have 
been laid down including an annual charge of $200. Now 
those desiring the privilege have to make application, to 
be approved by the Clearings-House Committee, and all 
exercising it must submit to an examination of their con 
dition and make a weekly statement, which is published 
like that of the member banks. This applies only to 
banks, but trust companies are required to make state- 
ments of their condition, which are not published. This 
must include capital, net profits, average of loans and 
investments, :i t m I of deposits, amount of specie, legal 

lenders and bank notes held, and the amount On deposit, 

in banks and other trust companies. A new rule requires 
them to hold a certain' percentage of lawful money 
reserve. 

Among the purposes served by clearing house associa- 
tions, apart from that of effecting the daily exchange of 
cheeks and settlement of balances, are cooperating together 
in support of Government loans or Treasury requirements, 
and for mutual aid in time of financial difficulty and 
establishing uniform rates of interest on deposits and 
charges for collection. It is not considered good banking 
to pay interest upon daily balances of depositors unless 
under special regulations as to the minimum balance to 
be maintained and the \-:\\^ to be paid, as the competition 
for deposits by offering to pay interest involves disturbing 

risks. The deposits upon which interest, is allowed are 

large, and mostly those of outside banks or of trust com 
panies. 'There is a clearing-house rule in some cities, 
though not in New York, qptablishing the minimum bal 
ance to be kept and the rate of interest, which its mem 
hers may allow. Another practise that has been instituted 



208 THE MODERN BANK 

is that of making a regular charge for out-of-town collec- 
tions. This also precludes a more or less demoralizing 
competition for deposits by the offer to make collections 
gratuitously or by underbidding the established rates. To 
prevent this, a regular schedule is prescribed for various 
sections of the country, determined by distance from the 
collecting centers, with a minimum charge for small sums 
and a certain small percentage on amounts above that 
limit. Here again the practise is not uniform, but most 
clearing-houses at important centers have an established 
rule. 

The most important service of the Clearing-House for 
the mutual support of its members in time of financial 
trouble is that of issuing loan certificates to be used in the 
settlement of balances instead of cash. On such occasions 
a special loan committee is appointed to issue the certifi- 
cate and pass upon the securities offered, which may in- 
clude good bills receivable as well as approved stocks and 
bonds. A careful record is kept and interest is charged 
upon the certificates, to be paid by the banks taking them 
out and turned over to those receiving them in payment 
of Clearing-House balances, which is the sole use that can 
be made of them. This is to insure their withdrawal when 
no longer needed. Their purpose is to relieve the strain 
upon banking resources and reserves in time of severe 
money stringency, and in effect they add so much to the 
currency in circulation by diminishing the amount in use 
by the banks for the settlement of balances between them- 
selves. They practically make of the aggregate reserves 
of all the Clearing-House banks a common fund for the pro- 
tection of their deposits, and in extreme cases there may 
be an actual apportionment of this fund for the temporary 
support of the weaker banks. The most important effect 
consists in supporting public confidence in the banks and 
allaying panic until the situation is relieved by liquida- 



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210 THE MODERN BANK 

tions and adjustments of resources and liabilities in the 
commercial community. 

Taking out the loan certificates is not made obligatory, 
and banks obtain and use them in the daily settlement only 
to the extent of their needs to enable them to meet other 
demands. It is a temporary resource, which is abandoned 
as soon as the occasion for it is fairly passed. It was first 
resorted to by the New York Clearing-House in I860, and 
the occasion rose two or three times during the civil war. 
During the Severe panic of 1873 loan certificates were 
again issued not only in New York but in several other 
cities. In New York the issue began in September and 
continued about two months, the aggregate being $26,- 
565,000, of which $22,410,000 were outstanding at one 
time. This expedient for relieving a local strain was re- 
sorted to several times in different cities between 1873 
and 1893, but in the latter year it was more extensively 
employed than ever before. 

In time of financial panic the strain is felt with special 
severity in New York, on account of the dependence of the 
whole system of credit upon its banks. Deposits and re- 
serves of country banks are largely withdrawn and the local 
demand upon deposits and for loans becomes extremely 
pressing. The trouble is intensified by the disposition of 
the timid to draw out cash and hoard it, and there is no 
doubt that the action of the Clearing-House in 1893 pre- 
vented the breaking down of some of the banks and many 
disastrous failures that would have followed. The issue of 
loan certificates began June 21st and ceased September 6th, 
the last of them being retired November 1st. The total 
issue was $41,490,000, the maximum outstanding being 
$38,280,000 on August 20th. The resort of clearing- 
houses to this device for tiding over a period of financial 
stress has been sometimes criticized as having no legal 
authority, but it is in its essence merely a process of the 



CLEARING-HOUSE AND OTHER ASSOCIATIONS 211 

banks loaning to each other on ample security through a 
voluntary association that insures payment. The associa- 
tion acts as in other cases as the agent of its members for 
their mutual benefit and not as an independent organiza- 
tion. The high rate of interest, which has ranged from 6 
to 9 per cent, insures the issue of certificates only so far 
and so long as they are imperatively needed. 

The clearing-house system has developed until there 
are one hundred associations in the United States outside 
of New York. Of these, eleven are in New England, all 
but three (New Haven, Providence, and Portland) in 
Massachusetts, eighteen in the Middle States (New York, 
New Jersey, Pennsylvania, Delaware, and Maryland), 
twenty-seven in the Middle West (east of the Mississippi 
and north of the Ohio), thirteen in the West (east of the 
Rocky Mountains), ten in the Pacific States, and twenty- 
one in the South. They differ in the details of their organ- 
ization and methods, as well as the extent of their activity, 
but their general character and purpose are everywhere 
the same, and their functions are determined by the needs 
of the communities which they serve. In a week when the 
total clearings for the United States have amounted to 
nearly $2,500,000,000, about $1,500,000,000 of these 
have taken place in New York. 

Canada has the clearing-house system, but its operation 
is simplified by the fact that there are only a small num- 
ber of banks, which maintain branches all over the Domin- 
ion. There are now only thirty-five incorporated banks 
in all, and of these, four are in Halifax, three in Quebec, 
six in Montreal, and nine in Toronto. Private banking- 
houses, however, participate in the exchanges. The Lon- 
don Clearing-TIouse is an important institution, and there 
are several others in Great Britain, but they are hardly 
known on the Continent of Europe. Their necessity and 
utility is reduced where there are a few great banks with 
15 



212 THE MODERN BANK 

branches, and one central institution, and where circu- 
lating notes are largely used and the check system is not 
highly developed. In this country they are of growing 
importance and exert a strongly conservative influence 
upon banking methods. Their functions are not unlikely 
to be considerably extended. It has been suggested 
that they may establish systematic means of collect- 
ing out-of-town checks, have agencies for investigating 
credit and disseminating information, and even that they 
be authorized by national law to apply the principle of 
loan certificates to the issue of an emergency currency for 
circulation in times of stringency in the money market. 

Bank associations in the broader sense are voluntary 
organizations formed for the discussion of banking ques- 
tions and methods, and the general promotion of the inter- 
ests with which banks are concerned. Associations have 
been formed in many of the States, and usually include 
both State and national banks, and sometimes private 
bankers, trust companies, and savings-banks. The Na- 
tional Association includes all these and has now about 
7,000 members. Among the objects promoted by these 
associations are better safeguards against crimes and 
casualties, safer and more uniform methods of banking, 
better means of investigating credits, the training of 
efficient clerks, and the improvement of laws relating to 
banking and the currency. 



XXVIII 

STATE BANKS AND TRUST COMPANIES ' 

Notwithstanding the development of the national 
banking system and the prohibitive tax upon • circulating 
notes of State and private banks. State banks have contin- 
ued to exist, and still outnumber the national banks in the 
United States. In a few States, including Massachusetts 
and Texas, there are none, and the laws in regard to their 
organization and regulation vary in different States. In 
some the minimum capital required is as low as $5,000, 
which accounts for their number in sparsely peopled sec- 
tions, where there is not sufficient inducement for estab- 
lishing national banks, which are not permitted to supply 
the need by maintaining branches or agencies away from 
the one place of business authorized by law or to organize 
with less than $25,000 capital. In some States banks are 
permitted to have branches, and in others not. Under the 
New York law those in a city of 1,000,000 inhabitants or 
more may establish branches within such a city, but not 
elsewhere. This applies only to the city of New York. 

In many States the banking laws are modeled upon the 
United States Bank Act, and in general the manner of 
organizing, methods of examination and supervision and 
character of business are substantially the same as those 
of national banks. There is usually some public officer or 
commission having charge of the execution of the laws 
relating to banks and other incorporated financial institu- 
tions. In New York there is a Superintendent of Bank- 

213 



214 THE MODERN BANK 

ing, whose authority is similar to that of the Comptroller 
of the Currency except as the latter relates to note circula- 
tion. He may direct examinations to be made and call for 
reports from time to time, at least four times a year, and 
in case of insolvency may have a bank placed in the hands 
of a receiver and wind up its affairs. Apart from the 
lack of circulation the business of a State bank differs 
in no respect from that of a national bank, and the 
methods and details are essentially the same in institu- 
tions of the same grade. In New York all are re- 
quired to keep a cash reserve equal to 15 per cent of 
deposits, and that is the usual rule in other States, there 
being no provision for " reserve cities." They belong to 
clearing-house associations along with national banks and 
make exchanges with them, and the general description of 
methods apply to the two classes of institutions alike. In 
]STew York city those which have joined the Clearing- 
House Association in recent years are required as a condi- 
tion of membership to keep a 25-per-cent reserve, and those 
which were members before the rule was adopted aim to do 
so as a matter of policy. 

Trust companies are a class of State corporations which 
do more or less of a banking business, the tendency in 
recent years being toward a development on that side. 
Their original function was to act as incorporated trustees, 
and the law relating to their organization and supervision 
seems to contemplate no other. They have no authority 
to discount commercial paper, but in the execution of their 
various trusts they receive money on deposit, and may loan 
it on either real or personal security and purchase, invest 
in and sell stocks, bonds, mortgages, bills of exchange, and 
" other securities." Under this authority it has become 
customary with them to take other deposits than trust 
funds, and according to the latest reports of those of New 
York to the Superintendent of Banking these " general 






STATE BANKS AND TRUST COMPANIES 215 

deposits " far exceeded in amount the " trust deposits." 
Some of them pay interest upon balances of only a few 
hundred dollars, and at the same time hold them subject 
to demand-checks. They also use the funds in almost every 
way that banks employ theirs, and though they can not 
discount notes without transcending their corporate powers, 
they are accustomed to buy them, which amounts to much 
the same thing. They may loan upon a greater variety of 
securities than banks, including real-estate mortgages, and 
are not restricted to any proportion of their capital in ma- 
king loans to a single borrower. They have the advantage 
of not being required to keep a cash reserve on hand, which 
would diminish their resources available for lending and 
investment. 

When these institutions were confined in practise to a 
strictly trust business cash reserves were not regarded as 
necessary, as their deposits were not liable to be drawn upon 
except on notice, and they had time to realize from loans 
and investments to meet all demands, and they were accus- 
tomed to keep deposits in banks upon which they could draw 
at need. These, with what cash they might see fit to keep 
in their own vaults, served all the purposes of a reserve. 
Such checks as were drawn upon them and deposited else- 
where, or drawn upon other institutions and deposited with 
them, they were allowed to exchange through some member 
of the Clearing-House without making reports of their busi- 
ness to that institution or being in any way subject to its 
rules. But as the banking operations of those in the city 
of New York increased, as their deposits and the use made 
of them took on more of a commercial character, and their 
checks multiplied, the competition with the banks in their 
own field began to cause dissatisfaction. To this was added 
a conviction that some of these companies needed the same 
safeguards for the security of their depositors that were 
by law required of banks. 



216 



THE MODERN BANK 



The first move made by the Clearing-House was to adopt 
a rule that no trust company should have the privilege of 
clearing its checks through a member of the association 
until it had been in business one year, and that all exerci- 
sing that privilege should be required to make a weekly 
statement of its affairs similar to that made by banks, so 
far as amount of loans and deposits and holding of lawful 
money was concerned. This latter requirement being ob- 
jected to, the Clear ing-House Committee consented to treat 
their weekly statements as confidential and not give them 
out for publication. The next move was to require those 
using the Clearing-House facilities to hold a specified per- 
centage of their deposits in a cash reserve in their own 
vaults. This was fixed at 5 per cent beginning with 
June 1, 1903, to be increased to 7\ per cent Febru- 
ary 1, 1904, and 10 per cent June 1, 1904, authority 
being reserved to the Clearing-House Committee to raise 
the requirement to 15 per cent in its discretion. This 
resulted in a number of the largest trust companies with- 
drawing from their clearing-house connection with banks, 
though they continued to keep accounts with them and to 
have large sums on deposit upon which interest was allowed. 
This made it necessary for them to pay their debit balances 
to various banks, on account of their own checks, every day 
over the counter on presentation of the vouchers from the 
banks. This they do in checks drawn upon banks in which 
they keep their deposits, and most of them have found it 
necessary to employ an additional teller to attend to these 
payments. The checks of other institutions deposited with 
them they dispose of by the simple process of including 
them in their deposits with the banks and leaving the banks 
to exchange them through the Clearing-House or make the 
collections. They find it necessary to keep more cash on 
hand and have more of their resources at immediate com- 
mand than before. 




STATE BANKS AND TRUST COMPANIES 217 

The extent to which trust companies have departed from 
their original functions or have extended those functions 
and taken on others of a strictly banking character differs 
widely. Some are still confined mainly to a trust business, 
taking deposits subject to demand-checks and making loans 
for commercial accommodation to only a limited extent and 
chiefly for those for whom they are acting in a trust ca- 
pacity and as an incident to their regular business. With 
others, banking is their main business and acting as trustees 
is incidental. There is every gradation between these. 
Among the proper functions of trust companies is having 
custody of funds from various sources for safe-keeping or 
investment, managing estates and properties, collecting the 
income and paying the expenses for the owners and receiv- 
ing a commission for the service. They may act as ex- 
ecutors and administrators in settling the estates of deceased 
persons and as guardians for minor heirs, and have charge 
of funds the right to which is in litigation, or which are 
in the custody of courts. Their deposits of money are 
ordinarily of a more permanent and stable character than 
those of banks, and they regularly allow interest upon them. 

Their use of the money is less restricted than that of 
banks. They usually loan it out for longer terms and upon 
a wider range of securities, being allowed to hold mortgages 
upon real estate as w T ell as a variety of stocks and bonds, and 
they may invest it in the actual purchase of properties of 
various kinds. But the most important function of the 
larger trust companies, from a financial point of view, 
arises out of their relation to other corporations and the 
part they take in the process of promoting, organizing, and 
reorganizing corporate enterprises, in which they act as 
both trustees and fiscal agents. When a new corporation 
is to be formed, it is common for a trust company to receive 
the capital as it is paid in and attend to the issuing and 
registration of stocks and bonds, and to become the trustee 



2 IS THE MODERN BANK 

of whatever mortgage may be given to secure its indebted- 
ness. It may continue as an agent to receive the earnings 
of the corporation on deposit, or such part of them as may 
be entrusted to it, and make the payments of interest on 
bonds and dividends on stock. It may be the trustee or 
agent for individual security -holders, as well as the cor- 
poration itself, to take care of their interests. 

When a railroad company or other large corporation 
becomes bankrupt and has to be reorganized or have its 
affairs wound up, it is a common thing for a trust company 
to be appointed as a receiver of its assets, or to act as a 
committee of reorganization, or, more often, to act as the 
fiscal agent for such receiver or committee in the execution 
of their functions. In case of reorganization and the con- 
version of securities, it receives the old bonds and certifi- 
cates of shares, attends to the issue of new ones, makes the 
transfers, keeps a registration of the holdings, and, in short, 
manages the details of the whole operation. In effecting 
the consolidations and combinations that produce what are 
known as " trusts," trust companies have performed a con- 
spicuous part as agents of the various parties primarily 
concerned and as custodians of capital and securities in- 
volved in the operations. They are not presumed to take 
risks or assume liabilities of their own in such proceedings, 
but only to perform services for which they are paid in 
commissions; but they do sometimes advance capital and 
even promote organizations and reorganizations, and hold 
stocks and bonds in the resulting corporations as their own 
property. Some have been formed mainly for that pur- 
pose, and are known as " corporation trust companies/' 
acting not only as registrars and agents, but as controlling 
stockholders. The promoting, however, is usually done by 
syndicates, made up of individual capitalists and banking- 
houses, which often jointly or severally underwrite the 
securities of the new organizations. 



STATE BANKS AND TRUST COMPANIES 219 

A trust company that does both a trust and a banking 
business, which is coming to be the common practise, keeps 
the two branches quite apart and has a full set of books 
and of clerks and tellers for each. The trust department, 
in fact, keeps a regular account with the banking depart- 
ment, appearing upon its ledgers as a depositor. It has 
immediate charge of receiving, investing, and handling the 
trust funds, and an account is kept upon the books with each 
person or corporation for which it acts as trustee or agent. 
There are certain prescribed investments for what are 
strictly trust funds, but, unless there is an order of court, 
anything may be done with them within the limits of the 
company's corporate powers, with the formal consent or 
agreement of those for whom they are held. They may be 
loaned upon mortgages and other securities, or invested in 
bonds, stocks, and other kinds of property. They draw 
interest, and usually it requires more or less time to realize 
upon them to advantage, but they can not be suddenly with- 
drawn from the company's custody. That is a matter of 
notice and a reasonable opportunity for preparation. 

On the banking side the business is conducted much the 
same as in a commercial bank. The deposits are made by 
regular customers from day to day and are subject to de- 
mand-checks, but as a rule they are fewer in number, larger 
in individual amounts, and less subject to small drafts and 
the necessity of many collections, than those of a bank of 
the same grade. The method of dealing with receipts and 
payments and of keeping records and accounts is not essen- 
tially different from that of a bank. The individual ledger 
accounts are kept in substantially the same way, but the 
general ledger of the company covers all branches of its 
business. The use of the commercial and personal deposits 
is kept apart from that of the trust funds. Trust compa- 
nies have no legal authority to discount commercial paper, 
but there is nothing to prevent them from buying notes, 



220 THE MODERN BANK 

and some of them do it to a considerable extent. They loan 
their funds on time and upon a variety of securities, and 
also make considerable use of them in demand or " call " 
loans. 

The practise of loaning on call with collateral se- 
curity has increased with the development of the banking 
side of the business, as a resource for meeting current de- 
mands without keeping a large cash reserve on hand. Some 
special features of banking have become enlarged in the 
hands of trust companies, as, for instance, that of issuing 
certificates of deposit. Persons engaged in changing their 
investments or those receiving large sums from sales of 
property, inheritance, or otherwise, deposit funds with a 
trust company and take a certificate of deposit, pending 
their decision to make some other use of them. This may 
be a time or a demand certificate, but the deposit can not 
be drawn upon at will. This can only be done by present- 
ing the certificate itself. Provision may be made for par- 
tial payments, payments on notice, or upon or after a cer- 
tain date. Interest is paid upon the deposits, unless they 
are small and temporary, and such are rarely taken, but the 
business is peculiarly safe for the company, as it deals with 
actual funds deposited, involving little or no risk or trou- 
ble in making collections. 

In allowing interest upon general deposits above a mod- 
erate limit, usually not less than $500, trust companies 
calculate this upon the daily balances. At the end of the 
month the average daily balance is computed and the rate, 
commonly 2 per cent, is applied to that average for the 
number of days in the month. While trust companies have 
a certain advantage in the uncontrolled practise of allowing 
interest on deposits, in a wide range of investment and use 
of their funds, and in freedom from any absolute require- 
ment of cash reserves, which is a restraint upon the exer- 
cise of discretion in the matter of keeping their resources 



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employed^ they have for the most part been conservatively 
and safely managed. Where it is otherwise, they are apt to 
come to grief without inflicting so much injury as would 
come from bank f ailures, and this danger itself operates as 
a restraint. A few have lost credit by becoming involved in 
speculative ventures. 






XXIX 

PRIVATE BANKING-HOUSES 

The private banker has by no means been superseded 
by the corporate banks of the present day, though the char- 
acter of his business has been somewhat changed by modern 
conditions. In fact, private banking-houses hold a very 
important place in the financial community, though their 
relation to the commercial community is comparatively in- 
significant. In a general way they may be said to deal with 
investments, and they may be broadly divided into two 
classes, one doing a domestic business and the other dealing 
with foreign exchange, though many do both, and some do 
both on a large scale, while others are devoted to special 
lines, such as dealing in municipal bonds or some other 
particular class of securities. Private banking is a business 
in which there is a good deal of latitude and little restric- 
tion, and hence a great variety of employment with funds 
of different kinds. It depends mainly upon command of 
capital and confidence, and upon sound judgment and finan- 
cial skill, and not upon public regulation or supervision. 

Banking-houses may receive deposits subject to check, 
but they do little of this except for customers who are at 
the same time investors and who desire this kind of accom- 
modation, and they keep no special reserve of cash to meet 
demand liabilities. This is a matter that rests in their own 
discretion. They do not as a rule discount commercial 
paper or make what are called " business loans/ 1 advancing 
money on personal notes or on the security of merchandise 

223 



224 THE MODERN BANK 

in transit or on sale. They do, however, buy and sell com- 
mercial paper and loan their balances, or funds not tied 
up in securities in their own hands, on " collateral," and 
some do a large business of this kind. Mostly these loans 
are payable on demand or on " call," though some houses 
make a practise of lending on time. The fact remains that 
their main business consists in buying and selling securi- 
ties, stocks and bonds of governments and of public and 
private corporations, and dealing in foreign exchange and 
foreign loans. They may buy on their own account to sell 
again, or they may buy and sell for their customers, thereby 
acting as brokers. The business of private banking and 
brokerage is closely associated, and some banking-houses 
carry securities on margins for their clients. 

An important function of the private banker is " pla- 
cing " securities for corporations issuing them — that is, un- 
dertaking to dispose of an entire issue, or a specific amount 
of an issue, in the market upon certain terms agreed upon. 
Ordinarily the price is fixed by agreement with the officers 
of the corporation issuing its shares or bonds, either on its 
first organization or a reorganization, or on an increase of 
capital, and the banking-house receives a commission on 
the amount disposed of. Sometimes the issue, or a certain 
portion of it, is underwritten by the banking-house, which 
means that it obligates itself to dispose of the entire amount 
on the terms agreed upon, and what it fails to sell on those 
terms it is bound to take and pay for itself. In case of a 
large transaction of this kind a syndicate may be formed 
consisting of a number of bankers and banking-houses, who 
agree together and with the other party concerned to carry 
the operation through. Each member of the syndicate binds 
himself to take a certain portion of the securities and to 
furnish his proportion of any cash that may be required in 
financing the operation, and for this service a certain per- 
centage of the amount is to be paid as a commission. 



PRIVATE BANKING-HOUSES 225 

A syndicate manager is appointed from the number, 
who receives a special compensation for his service in at- 
tending to the receipt and distribution of the securities and 
accounting for the proceeds. It is usually a part of the 
agreement that none of the bonds or stocks shall be sold 
until a certain date, that all may be on the same footing and 
that everything may be ready for placing them on the mar- 
ket to advantage. When the issue or any part of it is made 
each subscriber receives his pro rata share. If it is an 
underwriting syndicate, which is usually the case, a time 
is set w T ithin which the securities are to be disposed of 
and the proceeds accounted for, and each syndicate mem- 
ber must pay over his share and receive his commission at 
that time. If any of the securities are left on his hands, 
they are his and he can dispose of them at his leisure as 
best he may. There are obvious risks in operations of this 
kind. When successfully carried out they are apt to be 
profitable, but if unsuccessful they may involve losses that 
devour the commissions. When cash is pledged in advance 
to carry out a syndicate operation a percentage is paid on 
the amount pledged, all of which may or may not be called 
for. When the operation is completed the manager makes 
a report upon the result, the affairs of the syndicate are 
wound up, and it is dissolved. This device has been re- 
sorted to largely in the consolidation of industrial concerns 
in those combinations known as " trusts " and in floating 
new issues of railroad stocks or bonds. It transfers the 
risk from the corporations to the syndicates and concen- 
trates and facilitates financial operations that are too large 
for one concern to handle. 

Sometimes a single banking-house will undertake to 
place an issue of corporate stocks or bonds or a public loan, 
but frequently there is competition for the privilege. In 
the case of State or municipal bonds it is a common practise 
to invite bids and to allot the securities, when issued, to the 



226 THE MODERN BANK 

houses offering the best terms. In this case they purchase 
them outright and rely for their profit upon selling them 
in smaller lots at an advance upon the price paid. The 
same plan is often pursued in placing Government loans, 
though an arrangement may be made with a certain bank- 
ing-house, or with more than one, to take the entire issue 
on certain terms. It has occasionally happened that a syn- 
dicate or combination of bankers has been formed to loan 
money in the market at an agreed rate, to relieve strin- 
gency caused by a scarcity of funds or an unusual demand 
and to allay apprehension which might become intensified 
to a panic. Banks as well as private bankers have taken 
part in such movements, and it is one of the services that 
clearing-houses have rendered thus to combine banking 
resources and preserve confidence when it is endangered. 
Banking-houses, like incorporated banks, act as the 
agents of corporations, not only in placing their securities on 
the market, but in keeping .a register of their ownership and 
making transfers when they are bought and sold by others, 
but trust companies are more commonly employed for this 
service, which is not of a banking character. Buying and 
selling or transferring gold or other forms of cash is strictly 
a banking function, and it is done by private banking-houses 
as well as by incorporated banks. The latter do not act as 
brokers for their customers, and yet they often render serv- 
ices that relieve these customers from all occasion of dealing 
with brokers directly. Not only do they take their coupons 
and collect interest upon bonds, and collect the principal of 
the bonds when they have matured, but they will buy or 
sell securities for them through a broker. In New York 
a good deal of business of this kind is done by some of the 
banks, which have a regular connection with a stock-ex- 
change broker. Such business is done by regular banks to 
accommodate customers who have no relations with banking 
or brokerage concerns and do not desire to form any. They 






PRIVATE BANKING-HOUSES 227 

do not or should not take part in speculative dealings of 
any kind, except in making loans on ample security, but 
private concerns are under no such restraint. 

Foreign banks have agencies and conduct business in 
various parts of the United States, but the laws of the 
different States vary in regard to the privileges allowed to 
them. In some they may receive commercial deposits sub- 
ject to check, discount commercial paper, and perform all 
the regular functions of banking. This is not the case in 
Xew York. They can not take deposits or discount notes, 
but may transact the business usually done by private bank- 
ing-houses, dealing in securities, buying and selling com- 
mercial paper, and most of them make a specialty of for- 
eign exchange. Four Canada banks have agencies in New 
York city, where their funds are sometimes extensively 
loaned; these are the Bank of Montreal, the Bank of 
British Xorth America (of Montreal), the Canadian Bank 
of Commerce (of Toronto), and the Royal Bank of Can- 
ada (of Halifax). The London and Brazilian, London and 
River Plate, the Colonial of London, the African Banking 
Corporation (of London), the Chartered Bank of India, 
Australia and China, the Hong-Kong and Shanghai Bank- 
ing Company, and the Yokohama Specie Bank also have 
offices in Xew York. The International Banking Com- 
pany, recently organized, mainly for business in the Phil- 
ippines, China, and other parts of the East, has its head- 
quarters in that city. The banking connected with foreign 
trade and international exchange is mostly done by these 
agencies and the private banking-houses, and the greater 
part of this for the United States is carried on through 
Xew York. 



16 



XXX 

POKMOION WXOIIANOK AND I NTEKNATIONAL NANKING 

Nmxt to facilitating domestic commercial transactions 
the most important function of banking is dealing in 
foreign exchange, for that facilitates international trans- 
actions. This branch of the business is mostly in the hands 
of private banking-houses, which either have branches or 
establish intimate relations with other houses of a simi- 
lar character in the principal financial centers abroad, 
though a few national banks take a considerable 4 part in 
it. As New York is the chief center of domestic exchange 
for the United Stales, so London is the chief center of 
international exchange. 

For a clear understanding o( this subject some pre- 
liminary consideration must be given to the principle of 
foreign exchange and the use of bills of exchange, though 
the principle does no1 differ essentially from that of do- 
mestic exchange, and the use oi' "bills" is analogous to 
that of domestic drafts. In the commercial and financial 
dealings between two countries, as the United States and 
(3 real Britain, for example, there are constantly many pay- 
ments to be made in both directions. For the mosl part 
these are effected by transfers oi' credit from one side to 
the other, and only balances are finally paid in money, 
which in this case means gold, not gold dollars or pounds 

sterling, bu1 the metal geld by weight, whether in the 
form of coin or bullion. Exporters send American prod- 
ucts, say from New York jo Liverpool, or any English 

22S 



FOREIGN EXCHANGE AND INTERNATIONAL BANKING 229 

port, for consignees in different parts of the United 
Kingdom. A certain amount is due for these commodities, 
to be paid on this side of the Atlantic. At the same time 
importers are buying merchandise in England for which 
they must pay on the other side of the Atlantic. Instead 
of sending money back and forth these payments are set 
off against each other. In effect, the York importer pays 
over to the New York exporter what he owes to the ex- 
porter of his merchandise in England, and that exporter 
collects from the English importer of American produce 
the amount due to him, instead of leaving the latter to pay 
his creditor in New York, who has already got his money. 
That is the essence of the operation, assuming for illustra- 
tion of the principle that the values exchanged are equal, 
and that the parties to it on each side of the ocean come 
together in this way. In practise, of course, that is far 
from the case, and there is a multiplicity of unequal trans- 
actions going on all the time, and there is an intermediary 
between the parties in bringing about the settlements. 

To come down to practical facts, the New York ex- 
porter, when he sends a cargo of wheat or cotton to Eng- 
land, draws a bill of exchange, which is in effect a draft 
payable to himself for the amount due, upon his consignee 
or upon a banker with whom that consignee has the neces- 
sary credit and upon whom the American exporter is 
instructed to draw for his payment. The bill may be pay- 
able at sight, or thirty, sixty, or ninety days after sight; 
but, instead of sending it abroad for collection to get his 
money, the exporter sells the bill of exchange, after in- 
dorsing it, to a banker and gets his money at once. The 
banker having thus paid the exporter, sends the bill to his 
correspondent abroad and gets credit with him for the 
amount, the latter having the draft paid, if at sight, and 
accepted, if on time, in the latter case making the collec- 
tion at maturity. The proceeding of the British merchant 



230 THE MODERN BANK 

or manufacturer from whom the American importer has 
bought is similar. He draws his bill upon the American 
importer for the amount due for the goods and sells it to 
a banker, who sends it to a banking-house in New York 
for payment or for acceptance and collection, receiving 
credit for the amount. The process may not be so direct 
as this, for the first buyer of the bill may indorse and sell 
it to another banker who has larger or more direct con- 
nections for effecting the exchange, but so far as the 
exporters and importers are concerned, they get their pay 
by selling their bills of exchange, and the bankers, taking 
due precautions as to the credit of the parties, their right 
to make the drafts, and the assurance of acceptance and 
payment, attend to the rest. Their dealings are with each 
other and are effected by transfers of credit until there 
is occasion for paying some balance in money. 

The profit of the bankers, or their compensation for 
the service rendered, is involved in the rates of exchange 
or the price. at which the bills are bought and sold. What 
determines that price ? In a general way it is the same 
that determines the price of anything else, the law of sup- 
ply and demand. It would be a simple matter to explain 
. if there were a common money standard, but for the sake 
of conciseness we will take matters as they stand and deal 
with English and American money on the basis of $4,866 
as the equivaleut of a pound sterling at par. The Ameri- 
can exporter draws his bill for so many pounds sterling 
on his English customer, but whether he will get $4,866 
per pound for it, in case it is a sight bill, or more or less, 
depends upon circumstances. Suppose there is more ex- 
porting than importing going on, more payments to come 
from England than to go there, more sterling bills in the 
market than there is a demand for at par, on account of 
the state of the bankers' credits ; he will then have to take 
less than par. How much less will depend upon how much 



FOREIGN EXCHANGE AND INTERNATIONAL BANKING 231 

it would cost him, or a banker acting for him, to have the 
gold sent over from the other side for payment. That 
cost is determined by the charges for freight and insur- 
ance, interest on the amount for the time it is in transit, 
and the possible loss by abrasion, which with the present 
care in shipping is very slight. 

Gold shipments are made by bankers because they have 
facilities for doing it at the lowest cost and connections for 
making the transfers to advantage. The present cost is 
something less than two cents per pound sterling, and when 
sight bills go much below 4.85 they will not be sold, but 
arrangements will be made for importing gold. Bankers, 
however, will buy the bills at a rate which will give them a 
profit in importing gold to pay themselves, and draw bills 
on their own credits in London to pay for it, remitting these 
to their correspondents, for at such a time, when London is 
owing a balance to New York, they are likely to have large 
credits abroad. These are reduced by the purchase of gold 
while cash is increased at the New York end of the line. At 
a time of heavy exporting and large dues to New York from 
London, making exchange low at the former place, rates 
for money are apt to be high there and low at the latter 
place, and this facilitates the transfer of gold, since money 
tends to go from the place where it is in less demand to 
the place where it is in greater demand. This process of 
collecting payment by importing gold through the banking- 
houses will go on until the equilibrium is sufficiently re- 
stored to raise the rate of exchange, so that it will be more 
advantageous to sell bills at the prevailing price than to 
incur the expense of collecting in gold. 

While the essence of .the transaction is paying the cost 
of actual collection in preference to selling bills below what 
is called the " importing point," it will be seen that the 
trader does not actually import gold on his own account 
or require his foreign debtor to remit it at his expense, 



232 THE MODERN BANK 

but the whole process is a matter of banking and is at- 
tended to by the bankers, who buy the bills at the minimum 
price to which they will go and import the gold on their 
own account, diminishing their credits abroad and increas- 
ing their funds at home and making their profit in the proc- 
ess. Suppose now that the conditions are reversed, and, on 
account of heavy importing and relatively light export- 
ing of commodities, New York has more to pay to London 
than London has to pay to New York, taking these as the 
centers at which settlements are made: then bills drawn 
upon traders on the other side will be relatively scarce, 
foreign bankers will have larger credits on this side and 
American bankers smaller credits in London, which they 
will desire to increase, money rates will be likely to be 
relatively low in New York and high in London and the 
rates for sterling exchange will go up. They will rise 
until it becomes cheaper to ship gold abroad than to pay 
the price for bills, and that will be when sterling exchange 
is somewhat above 4.88. Bankers will pay for bills- of 
exchange up to the shipping-point; then, in response to 
the demand on the other side, where American exchange 
will be correspondingly low, they will find a profit in ex- 
porting gold. They will be drawn upon for it by their 
foreign correspondents in the banking business, and will 
honor the bills and reduce the foreign credits which they 
hold. These transactions have attained such dimensions 
that a profit of 3V per cent in shipping gold is enough 
to start the movement. 

What has been said about sterling exchange in New 
York applies equally to American exchange in London, 
but at any particular time the conditions will be exactly 
reversed. At either end of the line payments from the 
other end are obtained by drawing bills and selling them 
to bankers. The bankers send these over to their corre- 
spondents who attend to their collection, and there is con- 



FOREIGN EXCHANGE AND INTERNATIONAL BANKING 233 

stant communication back and forth in regard to their 
transactions with each other and constant transfers of 
credits. It is through these bankers' credits, based upon 
the buying and selling of bills of exchange, that the mass 
of international business transactions is carried on. It 
is only accumulated balances on one side or the other that 
are paid in money — that is, by the shipment of gold, and 
these bear a very small proportion to the bulk of the trade 
operations. It is another illustration of the extent to 
which credit is used to effect an exchange of commodities, 
which is in substance a barter of the products of labor, 
extending on a large scale to interchange between distant 
countries. 

This process of economizing the use of money, which 
in international trade means gold only, is carried to the 
highest practicable degree by various devices dependent 
upon credit and confidence. Even the fluctuations be- 
tween periods of heavy and light exporting are min- 
imized as much as possible. In advance of the heavy ex- 
porting season arrangements are sometimes made for 
drawing in anticipation of shipments of commodities, so 
as to extend the period to be covered by the supply of 
bills, and a corresponding extension may be made at the 
end of the season by deferring the drafts. The purpose is 
to prevent concentrating the supply of commercial bills 
and depressing exchange so as to force an unnecessary 
transfer of gold from the other side. Corresponding 
arrangements may be made when importing is relatively 
heavy, to avoid concentrating the demand for bills and 
forcing the rate to the exporting point unnecessarily. 
These arrangements are effected by bankers to bring the 
shipping back and forth of gold to a minimum, and they 
find a profit in thus equalizing so far as practicable the 
demand and supply for exchange, while it is also a gain 
for those who draw bills and those upon whom they are 



234 THE MODERN BANK 

drawn. There is economy for all concerned in reducing 
to the utmost the balances which have to be actually paid, 
at the expense of transporting gold from one country to 
another. 

The practical form which this controlling of the rate 
of exchange within certain limits usually takes is, that 
bankers draw their own time-bills for sixty or ninety days 
in advance of the heavy exporting season, intending to 
cover them with commercial bills later when rates are 
lower. Their correspondents accept these bills and give 
them credit for the amount at the prevailing rate of ex- 
change. When the commercial bills come into the market, 
payable perhaps at sight, the bankers buy these and remit 
them to cover their own maturing bills, and the foreign 
bankers collect them to satisfy the credits they have given, 
or if the commercial bills are not payable at sight they 
have them accepted and get them discounted, or hold them 
for collection, as best suits their purpose. It is a question 
of rates and of profit in the transaction. The commercial 
bills may be drawn upon consignees of merchandise or 
upon bankers, according to agreement between the parties. 

When the exporting movement is under way it is a 
common practise for the American banker- to buy com- 
mercial bills drawn for sixty or ninety days, which is the 
more usual form, and with these create credit with his 
foreign correspondent, against which he can later draw 
his own sight bills for sale in the exchange market. The 
bills, being sent abroad, may be accepted there and im- 
mediately discounted, the proceeds being credited by the 
foreign to the American banker. Many of these are what 
are called " documentary acceptances." The "docu- 
ments " consist of bills of lading, and sometimes certifi- 
cates of insurance, and of inspection in the case of grain 
or cotton, testifying to the value of the merchandise 
shipped. There may also be an invoice of the goods. 



FOREIGN EXCHANGE AND INTERNATIONAL BANKING 235 

These are attached to the bill of exchange when it is sold to 
the banker and give him a lien upon the merchandise 
as security. Ordinarily he instructs his correspondent to 
surrender the documents on acceptance of the bills. Then 
the goods can be delivered and the bills can be discounted 
at the prevailing London rate. It is a matter of confidence 
and fine calculation on the part of the bankers, who make 
their profit out of the rates of exchange and at the same 
time serve to distribute the demand and supply of bills 
in a way to give stability to the rates and minimize the 
occasion for settling balances by transfers of gold. 

What has been said about trade between the United 
States and Great Britain and payments between New York 
and London applies in principle and in practise to any two 
countries dealing w T ith each other, but the matter of 
foreign exchange is complicated by the fact that the bank- 
ing feature involves transactions that may include several 
countries which make settlements through the same finan- 
cial center. While payments may be made between New 
York and Paris, or Berlin, or St. Petersburg, they may 
be and often are made between New York and London 
on account of transactions in France, Germany, Russia, 
and other parts of Europe. Most of those with Oriental 
and South American countries and other parts of the 
world with meager banking facilities are made through 
London. A China merchant selling tea in New York will 
not draw upon his American consignee, but upon a London 
banker with whom the New York buyer keeps a credit or 
with whom the latter's American banker keeps a credit, 
because \\e can always dispose of a sterling bill on Lon- 
don, while he might not be able to sell an American bill on 
New York, no Ainerican banker with New York connec- 
tions being accessible. It is not necessary for our present 
purpose to go into these intricacies, but they suggest why 
London has become the " clearing-house of the world's 



236 THE MODERN BANK 

commerce " as the result of the wide extension of British 
trade and English banking. 

It is desirable to -go somewhat more into the distinction 
between commercial bills of exchange and bankers' bills, 
and the difference between sight and time bills. Time- 
bills sell at a lower rate than sight-bills and are less uni- 
form and stable in quotation, allowance having to be made 
for loss of interest on the amount to be paid and the risks 
attending a difference of credit in the drawers. As a gen- 
eral principle it may be said that the difference in price 
between a sight and time bill is the interest on the money 
for the period of maturing, but the bills of first-class houses 
in high credit will command a better price than others. 
Fluctuations in the value of money before maturity are 
also taken into account. Hence there is considerable 
variation from the " posted " rate in actual sales. The 
price of time-bills is affected by the rates for money at 
the place of payment, because they are remitted for ac- 
ceptance and usually discounted at the prevailing rate 
there. If the discount rate is high, the price the bills will 
command when drawn will be correspondingly low, and 
vice versa. 

Commercial bills of exchange are not ordinarily drawn 
payable to a third person, though if the drawer is owing 
money abroad at the same time that he is collecting there 
he may order the payment to be made to his creditor or to 
a banking concern with which he has established a credit. 
He may sell his own bill to another who has payments 
to make abroad, or the banker who buys it may sell to such 
a person with proper indorsement, and much of that is 
done; but the usual course is simply to draw bills payable 
to one's own order and indorse and sell them to a banking- 
house, which remits them to the foreign house with which 
it has connection, for acceptance, discount, and collection. 
The real exchange business is done by the bankers. If 






FOREIGN EXCHANGE AND INTERNATIONAL BANKING 237 

a man has payments to make abroad or desires to establish 
a credit there that may be drawn upon, he buys bankers' 
bills. These are drawn by bankers in one country upon 
bankers in another country and sold to those w T ho have 
remittances to make. They are drawn to the order of the 
persons to whom payments are to be made, and those per- 
sons receive payment or credit from the foreign bankers. 
International bankers keep credits with each other for 
carrying on this kind of business and notify each other of 
the bills drawn. 

The settlement of trade operations is by no means the 
only use of bankers' bills. They are used for establishing 
credits and drawing upon credits for a great variety of 
purposes, in the purchase and sale of all manner of loans 
and securities, and in borrowing and lending operations 
that take advantage of different rates of interest in differ- 
ent countries. The balances which are finally paid in gold 
are the net outcome of a complicated network of trans- 
actions which may involve movements to and from several 
money centers and reach pretty well over the world. There 
are two common forms of loan in the money market which 
should be understood in connection with dealings in foreign 
exchange. Again we will confine our attention, for the 
sake of simplicity, to New York and London, remembering 
that what applies in their case applies generally, though' 
American dealings witk Europe, and indeed with all the 
world, are largely through those two financial centers. 

Suppose there is a strong demand for money in New 
York and the rates are high there, while funds are plenti- 
ful in London and rates are low. Then many " foreign 
loans " are made in New York, which means in effect the 
same as borrowing in London. The process is for the 
New York banker to establish credit with a London house 
by drawing his bills upon it to an amount which it agrees 
to accept. The proceeds of these he loans in the market 



238 THE MODERN BANK 

at the prevailing rate. He may have an understanding 
in advance with those who desire the loans, being assured 
of a demand for the money when the bills are drawn. His 
profit is the difference between the local interest rate and 
the rate of discount for his bills in London, less other ex- 
penses involved. Such loans may accumulate to a large 
amount, if there is sufficient demand, and have a material 
effect upon the relation of credits between the two coun- 
tries, and consequently upon rates of exchange and the 
chance of a transfer of gold. The tendency will be to 
supply the demand for loans and depress the rate for 
money here, and to deplete the supply and raise the rate 
in London, and it may go so far as to turn the scale and 
lead to paying off the foreign loans and doing the borrow- 
ing at home. It will be readily seen how this may enter 
into the course of the exchange market and affect the move- 
ment of gold. 

There is quite a different class of loans, known in New 
York as " sterling loans," as distinguished from " foreign 
loans," because they are based upon bills on London, and 
never, or rarely, upon bills on any other financial center. 
A man desires to borrow a considerable sum which he can 
not obtain to advantage from the banks. He goes to a 
prominent banker with a London connection, who may not 
have the money to lend him on collateral security but will 
loan him his bill of exchange drawn upon London for, say, 
ninety days, taking his collateral, on an agreement that 
before the bill matures the borrower will provide for tak- 
ing it up with sight exchange. The borrower raises the 
money by selling the banker's " finance-bill " wherever he 
can find a purchaser, and in due time it is accepted in 
London under instructions from New York, with the 
corresponding credit. As it is maturing the borrower 
must furnish the banker with a sight-bill sufficient to cover 
it, or settle with him by a direct payment of the amount, 






FOREIGN EXCHANGE AND INTERNATIONAL BANKING 239 

in which case the banker will himself provide for extin- 
guishing the credit in London. The bills do not go out of 
the hands of the bankers effecting the loan, or affect the 
money market otherwise than as a domestic loan. It is 
merely a device for loaning the credit of the American 
banker by the use of his bills of exchange drawn upon a 
London banker. In fact, it is a form of loaning on col- 
lateral security, but its cost will depend upon the state of 
the exchange market. If exchange is high when the bor- 
rower sells the banker's time-bill, and low when he has 
to buy a sight-bill to cover it, it will cost him less for the 
loan than if the conditions are reversed, and this chance 
enters into his calculations. Sometimes, to make certain 
of the cost, he will buy the sight-bill, to be delivered and 
paid for at a future date, at the same time that he sells 
the ninety-days' bill, allowance being made for the time 
required for remitting it. In these cases the bankers are 
paid a commission for their accommodation, and the col- 
lateral security is surrendered when the settlement has 
been made. If the obligation is not met on time the securi- 
ties may be sold, as in the case of regular bank loans. 

There is one other use of bills of exchange that ought 
to be mentioned. Time-bills are sometimes bought for 
" investment," or for speculation. At a time when there 
is a prospect of advance in the. rates, which may some- 
times amount to a certainty, a bill for sixty or ninety days 
may be bought at a low rate, held till it matures, and sold 
as a sight-bill at the advanced rate. Even if there is no 
advance the higher rate for sight exchange will be equiva- 
lent to interest on the sum invested in the bill, and if there 
is an advance it will be equivalent to so much more inter- 
est. If there should be a decline in exchange there may 
be a loss from what the same amount of money would have 
brought if loaned out. Hence the process has something 
of the character of temporary investment and something 



240 THE MODERN BANK 

of that of speculating upon the fluctuations of exchange. 
The variety of uses of foreign exchange above described 
give to international bankers a large part of their business. 
For the most part, this kind of business is carried on by 
private banking-houses, but some national banks estab- 
lish connections abroad for the purpose of taking part in 
it, particularly in dealing in foreign loans. 

Another feature of the business of private bankers 
with foreign connections, which has already been men- 
tioned, is that of issuing letters of credit, mainly for the 
use of tourists and travelers. A letter of credit is obtained 
by paying to the banker the amount of money it is desired 
to draw from time to time on one's journey, and it in- 
troduces the holder to the foreign correspondents of the 
banking-house, certifies that he is authorized to draw upon 
its London, Paris, or Berlin agent, as the case may be, 
to the amount stated, and requests that his drafts be 
honored. The signature of the holder is written at the 
foot of the letter and sometimes a personal description is 
given. A list of the correspondents is contained on a sepa- 
rate leaf. Whenever a draft is made abroad it must be 
signed in the presence of a representative of the corre- 
spondent by whom it is to be paid, and an indorsement is 
made on the back of the first leaf of the letter, with date, 
name of the house making payment, the place of payment 
and the amount, both in writing and in figures. These 
drafts will generally be honored wherever the house issu- 
ing the letter and the branch or agent upon which they 
are drawn are well known, even by banking concerns 
which are not included in the list, and corresponding 
transfers of credit will be made. Whatever may remain 
of the amount authorized to be drawn when the traveler 
returns will be redeemed by the banking-house issuing the 
letter. Ordinarily a commission is charged for the use 
of the letter, but if the amount is large and the contem- 



FOREIGN EXCHANGE AND INTERNATIONAL BANKING 241 

JXb: 

ADDRESSED TO THE CORRESPONDENTS 




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Form of Letter of Credit for Use of Travelers. 

plated period of absence considerable, the use of the funds 
while undrawn is considered sufficient compensation and 
there is no charge. Interest may even be paid in some 
cases. 








M 
o 

w 

6 






FOREIGN EXCHANGE AND INTERNATIONAL BANKING 243 

A device of international checks has been coming into 
use of late. These are in the form of drafts or orders to 
pay for small amounts, usually four or five pounds sterling, 
or the equivalent in different currencies, issued by the 
home banker upon his foreign correspondents and sold 
for a small commission upon the sums they represent, 
which have also to be paid, of course. The buyer 
of the checks has to write his name on the face of 
each, and there is a space below it for his signature again 
when he has them cashed, which affords evidence of gen- 
uineness. These checks, usually drawn upon a London 
banking-house, are readily cashed all over Europe by 
bankers and even by hotel-keepers, either at par or for a 
small commission, for they furnish exchange upon Lon- 
don, which is always and everywhere in demand. Drafts 
can be made on the London house with the checks attached 
and turned over for collection. 

When credits abroad are required immediately they 
may be made by " cable orders " from the domestic to 
the foreign banking-house. These command a slightly 
higher rate than those for sight-bills, as there is no loss 
of interest for the time of transmission and a small ex- 
pense is incurred in cabling. It is a matter of immediate 
transfer of credits between the bankers for the benefit of 
customers who pay for the service in the rate charged for 
" cable orders.'' Their use is not different from that of 
bills of exchange except in the saving of time. 



17 



XXXI 



SAVINGS-BANKS 



Properly speaking, savings-banks do not conduct a 
banking business, and such institutions are not banks in 
the strict sense of the word, but in some States commercial 
banks are permitted to have a savings department, and 
separate savings-banks may be closely associated with 
them. Sometimes the savings funds, instead of being care- 
fully invested, are kept in the banks of deposit and used by 
them in their ordinary business. This is a bad system, 
and subjects the savings deposits to risks inconsistent with 
the legitimate purpose of such institutions. When a man 
makes a deposit in a commercial bank he intrusts the 
funds to it for its own use. It makes him its creditor. He 
is entitled to no increment from the use of the funds un- 
less the bank has agreed to pay him interest, and has only 
a claim upon it for the amount due him. A savings-bank 
takes deposits not for its own use, but for safe keeping 
and the sole use and benefit of the depositors. The prime 
consideration is safety, not profit or income. Under 
proper regulations the bank is in charge of a Board of 
Trustees, who are precluded from making a profit out of 
it for themselves. They are authorized to employ the 
necessary officers and clerks for conducting it and to make 
all requisite disbursements for expenses, but the funds 
belong not to them or to the bank, but to the depositors 
collectively, and are held in trust. They are to be invested 
244 



SAVINGS-BANKS 245 

safely in a prescribed manner, and the revenue derived 
from them is to be credited to the depositors and distrib- 
uted to them in dividends, or " interest/' determined at 
intervals, it may be semiannually or quarterly. The 
entire increment over and above the expenses of manage- 
ment belongs to them. There may be a surplus fund 
accumulated as a security against the depreciation of in- 
vestments or other contingencies, but this remains the 
property of the depositors and is for their security. It 
is in no sense " undivided profits " of the bank. 

The deposits of savings-banks are not loaned on per- 
sonal security, but invested. Even what are called real- 
estate loans are more properly investments in the bond 
and mortgage security, which should be a first lien upon 
the property and not exceed a certain percentage of its 
value, allowing such a margin as will be a safeguard 
against loss by shrinkage. Under the laws of New- York 
savings-bank deposits can only be loaned upon first mort- 
gages on real estate to not more than 60 per cent of its 
market value, or invested in bonds of the United States, 
or of States which have not defaulted in the payment of 
interest or principal on their obligations, and those of 
counties, cities, towns, and school districts in the State and 
certain specified cities in other States, and of certain rail- 
road corporations named in the law. The tendency has 
been to extend the range of these investments on account 
of the large increase of deposits and a relative diminution 
in the volume of available securities of the first class, but 
the consideration of absolute safety is kept in view, though 
it may result in a reduction of the dividends that might 
be paid. Only funds awaiting investment or liable to be 
needed to meet demands for withdrawal or other pay- 
ments are kept on deposit with regular banks. 

Laws relating to savings-banks differ in different 
States and in different countries, and few are so strict as 



246 THE MODERN BANK 

those of New York. In what follows we shall only deal 
with the savings-bank as strictly an institution for savings 
under rigid regulation and supervision. The control is 
placed in a board of trustees consisting of men who are 
presumed to be responsible and of high character, and 
they are permitted to fill vacancies in their own number, 
making it a self-perpetuating body. Its members serve 
gratuitously and are assumed to have no personal interest 
in the use of the funds. They choose the officers, who are 
paid to manage the affairs of the bank under their direc- 
tion, decide upon all investments, and declare the dividends 
or rate of interest to be paid upon deposits, usually semi- 
annually but in some cases quarterly. They hold frequent 
meetings to receive reports from the officers, pass upon 
real-estate loans, authorize investments, and otherwise 
exercise the duties of direction, for in them all final 
responsibility is lodged. Usually the officers are chosen 
from their number, and they authorize the employment 
of the tellers, bookkeepers, clerks, and other employees, 
and fix their salaries. 

A large savings-bank in a city has an active president, 
treasurer, and secretary, and these officers may have any 
necessary assistants, but in a small institution the presi- 
dent may take no active part in management, and the execu- 
tive duties may be concentrated in a single officer called 
the secretary and treasurer. In the former case the presi- 
dent is the direct representative of the trustees and exer- 
cises general supervision over the affairs of the institution. 
The secretary keeps the minutes and records of the Board 
of Trustees, attends to the correspondence, acts as general 
auditor and accountant of all the departments, looks after 
the filing and custody of documents, and has charge of 
the bookkeeping of the bank in its outside dealings, as 
distinguished from the bookkeeping for the accounts of 
depositors, which is a department by itself in charge of a 



SAVINGS-BANKS 247 

head bookkeeper. The treasurer has the custody and man- 
agement of investments, controls the cash, deposits funds in 
other banks, draws checks upon them, which usually have 
also to be signed by the secretary and countersigned by 
the president, collects interest on investments, including 
mortgage-loans, receives payment of principal of matured 
obligations and for securities sold, receives applications 
for loans and refers them to the Board of Trustees, makes 
payments for the bank and otherwise performs the duties 
of its financial officer. The important subordinate em- 
ployees are a receiving teller, paying teller, and book- 
keeper, with such clerks as may be necessary to assist 
them. The janitor is also an employee of consequence, 
for, besides having charge of the premises, he keeps watch 
over the depositors as they come and go and acts as mes- 
senger and general factotum. 

When a depositor opens an account his name is en- 
tered in a book, with his residence, his place of birth, the 
names of his parents, and other facts useful in establish- 
ing identity, and his signature is added, if he can write ; 
if not, he makes his mark. Sometimes these entries are 
made upon cards to be filed or pasted in books. He re- 
ceives a pass-book, which bears a number as well as his 
name. As this is to contain the account of the bank with 
him, whatever he deposits is entered upon a debit page as 
being due to him, and whatever is drawn out is credited 
to the bank on the opposite page. The balance is always 
a debit balance in the pass-book, being due to the depositor, 
and there can be no overdraft to produce a credit balance, 
which could be made in no other way. He states the 
amount he desires to deposit and signs a slip or ticket 
upon which it is entered and presents the book with the 
money to the receiving teller. Sometimes the teller does 
the entering upon the slip and no signature is required in 
making a deposit. The amount of the deposit is entered 



248 THE MODERN BANK 

in the pass-book on the debit side and also in the teller's 
deposit-book. In a large bank this is done by a separate 
clerk, who hands back the book at another window; and 
in a small bank the teller not only enters the amount in 
the pass-book and in his deposit-book but sees it posted at 
once in the bookkeeper's ledger, where it is credited to 
the depositor. 

Where there are many depositors their names and 
the facts relating to them are kept in an alphabetical 
index of cards after the manner of a library catalogue. 
Many deposits are made by persons as trustees for 
others, especially minor children or persons unable to 
attend to it for themselves. As the amount that will be 
received from the same person is usually limited to a 
certain sum, this depositing as trustee is often resorted 
to as a means of dividing one person's money into more 
than one deposit. Checks and drafts in proper form will 
be received at most savings-banks and credited at once, but 
no drafts against the proceeds will be allowed until after 
these have been collected. 

The receiving teller's duty is to receive and duly enter 
all deposits, and he must account each day for his work. 
He may keep up the entries in his deposit-book during the 
banking hours or complete them from the deposit-tickets at 
the close. All bank-checks and drafts taken pass to the 
treasurer to be indorsed and deposited in a regular bank and 
a separate account is kept of them. The cash goes to the 
paying teller, either from time to time during the day on 
requisitions from him or after business with depositors 
is over. The receiving teller makes up a proof of his work 
and reports the day's transactions at his desk to the secre- 
tary. The proof consists in noting any balance with which 
he began the day and the amount received as indicated in 
the footing of his deposit-book, and setting against this the 
amount turned over to the treasurer, that charged to the 



SAVINGS-BANKS 249 

paying teller and any balance left on hand. Obviously 
these amounts should exactly balance. 

In one large savings-bank in New York an ingenious 
machine, specially invented for it, is used to list the day's 
deposits, which dispenses with the use of the teller's 
deposit-book. It is based upon the principle of the arith- 
mometer and cash-register, with a new application. The 
date is set for the day and the machine enters that and 
the amount of the deposit in the pass-book, which is placed 
in a proper position, and when the right keys have been 
pressed is pushed in with a movement that sets the 
mechanism in operation under the impulse of a small mo- 
tor. By a single movement the entry of date and amount 
is made in the book, and the amount is also impressed upon 
a paper ribbon which is to receive the list of one deposit 
after another. At the same time the aggregate of succes- 
sive deposits is kept up within the machine, to be taken 
off at the close of the day, and it is also continued day 
after day, so that the total of all deposits from the time 
the machine began to be used can be ascertained at a 
glance. The list of deposits for the day is taken off at the 
end of banking hours and pasted in a book, where it can be 
compared with the deposit-tickets and with the ledger en- 
tries. The machine not only saves labor but contributes 
to accuracy. When the teller reports his receipts to the 
secretary, the latter enters the aggregate in his book, but 
if there is any discrepancy between the actual receipts and 
the teller's entries which can not be reconciled, his account 
is either " over " or " short " and there is a charge to " ex- 
cess " or " deficiency " account. If this is not traced and 
rectified, the teller has to make up the deficiency, but he 
never gets the excess. 

When a depositor wishes to draw out money he pre- 
sents his pass-book at the paying teller's window and names 
the sum desired. This is written upon a draft' which he is 



250 THE MODERN BANK 

asked to sign, and he is usually asked some question which 
will serve to identify him. In some savings-banks there 
are blank forms of drafts which the depositor himself fills 
out. Unless he is well known to the teller, reference is 
made to the bank's book in which his application was 
originally entered to verify the identity of the person and 
the signature. Then the date and amount drawn is en- 
tered upon the credit page of the pass-book, which is handed 
back to the depositor, who is called by name and asked to 
state the amount asked for. Sometimes paying the money 
and returning the book is done by a different person from 
the one who receives the application. The paying teller 
begins the day with a certain amount of money in his 
drawer and may replenish it by requisitions on the receiv- 
ing teller. When depositing exceeds the drawing out, 
there will be a surplus each day to be turned over to the 
treasurer, and if the drafts at any time exceed the deposit- 
ing, requisitions may be made upon the treasurer for funds 
to be taken from the vault, or, if necessary, drawn from 
a bank. Such periods can usually be foreseen and pro- 
vided for, but occasionally there may be a " run " on the 
bank. It is good policy to meet this by promptly paying 
every demand, but the bank has the right to require notice 
of a certain number of days, usually thirty, of the inten- 
tion to withdraw deposits. Payments will be made by 
check on a regular bank if desired, but this must be signed 
by the officers, and the teller receipts for it on the stub of 
the check-book, and the secretary makes a record in his 
books, as he does of the checks received on deposit. 

The paying teller keeps a " draft-book " in which he 
enters the drafts paid against the number of the account 
in each case, not the name of the depositor, and he makes 
up a " proof " of his day's work. This he does by footing 
up all payments from the drafts themselves or from his 
draft-book, adding the balance he has on hand and setting 



SAVINGS-BANKS 251 

against this the balance he had in the morning and what 
he has received during the day from the receiving teller 
and the treasurer. The two totals will balance if there 
is no error, and a report of the day's transactions at his 
desk goes to the secretary. 

The bookkeeping of a savings-bank is important but 
not complicated, as it relates only to the deposits received, 
the payments made to depositors, and the interest on their 
accounts at the rate declared by the Board of Trustees 
near the end of each half-year or quarter, as the case may 
be. The bookkeeping of one day is done for the opera- 
tions of the day before. All the deposit-tickets and drafts 
bear the numbers of the several accounts to which they 
belong and have been stamped with the date. The ac- 
counts are kept in a ledger ruled with columns for the 
date, for the credits or amount of deposits, debits or 
amount of drafts, and the balance. They are arranged 
consecutively by the numbers of the accounts and not 
alphabetically by names of depositors, but the name of 
the depositor is written above each. Usually several are 
kept upon each page of the large ledgers. Methods differ 
in different banks, but there are two principal ones. By 
one- of these the credits are entered from the deposit-tickets 
and the debits from the drafts, and a new balance is entered 
by adding the credit or deducting the debit, as the case 
may be, thus keeping up the actual balance with each 
new entry. By the other method the balance only is en- 
tered by mentally adding the credit or deducting the 
debit, and another clerk, or assistant bookkeeper, enters 
the credit or debit by noting the difference between the 
two balances and comparing it with the lists of deposits 
and drafts, or with the entries in a journal of credits and 
debits when these lists are not used. The entries in this 
journal are made from the deposit and draft books and 
it becomes in effect a detailed " proof-book." The de- 



252 THE MODERN BANK 

posit-tickets and drafts, the teller's books or lists, and 
the journal contain repetitions of the same items, with 
which the ledger entries must agree, if all are correct. 
The aggregates are transferred to a daily proof-book and 
compared with the tellers' reports to the secretary. If 
there are discrepancies they must be hunted down and 
rectified. In most savings-banks a monthly proof-book is 
made up for the transactions of the month, and there may 
be others for longer intervals. 

After the trustees have declared the dividend rate 
for the half-year the amount is computed for each account 
by the bookkeepers. It is a simple matter, as interest 
is allowed only on a complete balance running through 
the period, whether a quarter or half-year. Any deposit 
made after the beginning of the period is not included, 
and any draft made before its close is excluded. This 
always affords a considerable margin of investment funds 
upon which no interest is drawn and helps to keep up the 
rate for the rest. The interest is entered in the ledgers 
at the end of the period in red ink, and if not drawn out 
is added to the balance at that time. A separate interest 
and balance book is usually kept in which the items of 
interest and balance are separately entered, also in . red 
ink. There is one of these for each ledger, covering the 
same accounts, and the aggregates of the interest items 
from the two sets of books should agree and furnish a 
" proof " exhibit of the total dividends. A record of this 
goes to the secretary, to be entered with other aggregate 
items to show the condition of the deposit-accounts. 

A word should be said about the closing of accounts. 
When an entire deposit is drawn out the account is closed 
at once and the pass-book is surrendered to the paying 
teller, who includes a statement of all such in his daily 
report. An appropriate entry of the closing of the ac- 
count is made in the ledger, and the index-card for that 



SAVINGS-BANKS 253 

account is taken from its place and filed with others of 
the same kind in another drawer, with the date of closing 
noted upon it. Closed accounts are not included in the 
" interest and balance book/' as the right to dividends is 
forfeited for any remnant of the dividend period. 

The business of managing the investment of the funds 
is quite apart from that of the deposit department and is 
in immediate charge of the officers. The trustees decide 
upon the securities to be purchased within the limits 
allowed by law, and upon the loans to be made on bond 
and mortgage, but the treasurer has the active manage- 
ment of this branch of the business. In some savings- 
banks he has an assistant who investigates the property 
offered as security with reference to its value, present and 
prospective, and the possibility of any existing lien upon 
it or any flaw in the title. An attorney is entrusted with 
the actual negotiation, the drawing of papers and the 
searching of titles, and when the treasurer draws the 
bank's check for the amount of the loan he takes a formal 
receipt with the mortgage bond, an abstract of title, and 
a policy of insurance, if there are buildings on the 
property. These documents are filed away in envelopes 
serially numbered, the application for the loan and the 
abstract of title being usually enclosed separately. The 
treasurer collects the interest semiannually, sending no- 
tice some days in advance in a form that may be signed 
as a letter of remittance, and gives the bank's receipt when 
payment is made. If this is made by check he includes 
it in his bank-deposit; if in money, he may pass it over to 
one of the tellers, who gives a voucher for it and includes 
it in his daily statement, credited to the treasurer. 

Other investments are dealt with in a similar way, so 
far as collections and accounts are concerned, and the 
secretary has charge of the bookkeeping for this side of 
the bank's transactions, which do not differ essentially 



254 THE MODERN BANK 

from those of any financial concern. The secretary keeps 
a daily cash-book, accounting separately for money passing 
through the hands of the tellers, that in the custody of the 
treasurer, and that deposited in a regular bank. It also 
contains a record of transfers from one account to another, 
as such transfers may be made, a special ticket being some- 
times used, consisting of two parts, one representing a 
draft by one depositor and the other a deposit by the other. 
This is divided in making the credits and charges, and of 
course the funds in the bank are not affected, except to 
transfer a certain sum from one account to another. A 
general ledger is kept recording all the business of the 
institution, but in form and method it does not differ es- 
sentially from that of any business concern, crediting 
receipts to different accounts such as deposits, interest, 
and other payments to the bank, and debiting payments 
from the bank for different disbursements and expendi- 
tures. A daily " balance-sheet " is usually kept at the 
bottom of the page of each day's entries, showing the exact 
condition of the bank on that date. The secretary not 
only has charge of this general bookkeeping, but keeps a 
file of all letters received and has copies made of all 
sent out. 

A savings-bank may only own real estate used for its 
business, except that it may acquire it by foreclosure of 
mortgage or by purchase to secure a payment and hold 
it until it can be advantageously disposed of. In the mean- 
time it may be rented out and the care of such property 
and income and expense on account of it become an in- 
cident of the business. Any part of the bank's premises 
not required for its use may also be rented. 



XXXII 



SAFE-DEPOSIT VAULTS 



The mere safe-keeping of money or other valuables is 
no longer a part of the business of banking, though it was 
chiefly that for which banks were first instituted. But there 
has been in recent times such a multiplication of the forms 
in which value is represented, especially in stocks, bonds, 
mortgages, and other titles to property and evidences of 
debt, that a new need has arisen for places of absolute safe- 
keeping against the chance of loss by fire, theft, or other 
casualty. In a highly developed commercial community 
banks can not afford space in their safes and vaults for such 
valuables, merely to accommodate their customers and keep 
guard over their possessions, and furnishing places of safe 
deposit has become a separate business. It may be regarded 
as incidental to banking so far as it concerns securities used 
in connection with loans or in transit for purchase or sale or 
for registration and transfer, but not for the care of individ- 
ual property upon which the bank has no claim or lien and 
with which it is not dealing. Under the laws of some 
States, of which Xew York is one, no corporation can ex- 
ercise any powers not specifically granted or not incidental 
to the exercise of those that are so granted. The National 
Bank Act confers no powers except " such as shall be neces- 
sary to carry on the business of banking," which is defined 
as discounting and negotiating promissory notes, drafts, 
bills of exchange, and other evidences of debt, receiving 
deposits, buying and selling exchange, coin, and bullion, 

255 



256 THE MODERN BANK 

loaning money on personal security, obtaining, issuing, and 
circulating notes according to the provisions of the act. 
This definition is generally followed in State bank laws, 
but there are banks which maintain safe-deposit vaults, 
and the legal right has not been questioned. It may be that 
it would be judicially held to be properly incidental to the 
business of banking, as it affords to customers a place of 
safe-keeping for valuables which constantly enter into bank- 
ing operations. This may also be incidental to the business 
of a trust company. 

The need of systematic provision for the safe-keeping 
of securities, documents, and other valuable property has, 
however, led to establishing and managing safe-deposit 
vaults as an independent business, and corporations are 
organized to conduct it on a large scale. The premises are 
usually in the basement or lower part of a fireproof and 
well-protected building, and are especially equipped and 
fitted for their purpose. There is always one large vault, 
and there may be more than one. This is usually so con- 
structed as to be entirely separate from the walls, floor, and 
ceiling of the building. The structure is of steel, some- 
times heavily incased with brick, and has thick double doors 
with complicated locks. The outer door has a combination 
lock of which only one person knows the secret — or the 
secret may be divided between two or more persons, no one 
having the entire combination. The inner one is set on a 
different combination known only to another person or set 
of persons, and this will only work on the running down of 
a clockwork mechanism, a certain number of hours from the 
closing of the vault, when the mechanism is wound up and 
set for the hour of opening. Thus it requires at least two 
responsible persons to open the vault, and they can not do 
it between the time of closing and that set for opening. 
Within these heavy double doors is another door or gate of 
light grilled construction for going in and out during busi- 




Entrance to Safe-Deposit Vault, showing the 
Behind the Outer Grill. 



Two Doors Open 



258 THE MODERN BANK 

ness hours. Some of the newest vaults have a single door, 
circular in form and provided with a specially complex 
locking mechanism. 

The inner walls of the vault are lined with steel com- 
partments of various sizes, each with its separate door and 
lock, the rents for their use varying with the space occu- 
pied. Here it requires two keys and two persons to 
gain access to one of the boxes kept in these strong com- 
partments. The superintendent or custodian has a single 
key which must be turned in the lock before the key of 
the tenant will open it. Each lock is different from every 
other, and the key of the tenant will open only his own; 
and whenever a box is newly rented a new lock is fitted to 
the door with a key unlike any other. No tenant, however 
well known, can enter the vault or gain access to his own 
rented compartment without being accompanied by the per- 
son in charge, but no representative of the company knows 
or has a right to know what the box contains. The exact 
legal responsibility of such a corporation has never been 
defined, but it is of the essence of the business that it shall 
have no control over the valuables deposited and shall put 
no restriction upon the control of the owner, except so far 
as is necessary to insure safe-keeping. 

Within the locked compartment is a separate box, usu- 
ally of tin, with a lock of its own, and this can be taken 
out for examination or change of the contents. Rooms are 
provided outside of the vault itself, but convenient to it, 
to one of which the owner of a box can retire and do what 
he will with his own in entire safety, for a strict guard is 
kept at all times. Nobody is admitted who is not known 
to the superintendent or does not bring satisfactory creden- 
tials, and every tenant must be personally known. When 
any person rents a box his name and address are registered, 
with a personal description and particulars of parentage 
that will make his identification certain, and his signature 



260 THE MODERN BANK 

is also taken. A compartment may be taken by two per- 
sons, or special arrangement may be made for access to it 
by a properly accredited agent, who must himself be known. 
In the absence of such an arrangement, if a tenant dies, 
his box can only be opened by the legal representative of 
the estate on a certificate of the surrogate or probate judge, 
which shall assure the company of the right of such repre- 
sentative to the control of the property of the deceased. In 
addition to all other precautions, at least two trustworthy 
watchmen are kept on duty day and night. Sometimes 
such vaults are an adjunct of a bank and intended for the 
keeping of money, securities, and documents or valuables 
in small compass, and sometimes they are appurtenant to 
storage warehouses and used for more bulky articles as 
well. 

The records and bookkeeping of a safe-deposit company 
are simple, and its relation to its customers is in effect that 
of landlord and tenant. The latter is bound only to pay 
his rent and submit to such restrictions as are necessary for 
the safety of his own property and that of his fellow ten- 
ants, for which the company makes itself responsible only 
on the conditions which it imposes. Apart from the books 
containing the signatures, addresses, terms of rental, etc., 
of those renting compartments in the vaults, there is usu- 
ally a card-index alphabetically arranged in a case of 
drawers for ready reference. 



XXXIII 

DEVELOPMENT OF MODERN BANKING 

The modern bank is a development of the last two or 
three centuries, but the evolution has had a rapid culmina- 
tion within a comparatively few years and is not yet com- 
plete. The vast extension and complexity of industrial, 
commercial, and financial relations have compelled the use 
of credit upon a scale never before imagined, and has 
wrought wonderful changes in the manner of applying it 
with effect and safety. Trading and borrowing and lend- 
ing come down from primitive times, and bills of exchange 
for making transfers between distant places are of an- 
cient date. For ages they were simple orders upon one 
person to pay to another, or drafts upon a debtor which could 
be made over to a creditor, and were negotiated through 
intermediaries, who bought and sold them to serve the con- 
venience of traders. Collections and the settlement of bal- 
ances were subject to uncertainty and loss, but the range 
of traffic and exchange was narrow, and " money-dealers " 
established fairly safe relations with each other at the few 
trading centers. 

The first banks were hardly more than agencies for 
concentrating and managing the loans of governments, and 
as such had their origin in Italy as early as the twelfth 
century. The word " bank " originally signified a " pile " 
or " mass " of funds, like the Italian " monte " and the 
French " mont," and was applied to the massing together 
of various government obligations, or their consolidation 

261 



262 THE MODERN BANK 

in sets of negotiable securities, which were issued, trans- 
ferred, and paid through " bankers/' who sometimes col- 
lected the public revenues and made payments in connec- 
tion with the handling of public debts. It was for such 
functions as these that the first banks were established 
at Venice, Florence, and Genoa. But when a large and 
lucrative trade was developed by the enterprising merchants 
of those cities with the Levant and the Orient, and later by 
those of Antwerp and Amsterdam with distant parts of the 
world, as the result of the discoveries and adventures of 
the navigators of the fifteenth and sixteenth centuries, the 
necessity arose for some means of effecting commercial 
exchanges on a scale never before known, at least not since 
the dim ages of Phenician, Babylonian, and Egyptian 
traffic. 

At that time the supplies of money in Europe were 
inadequate to meet the new demands, and there was a 
multiplicity of coinages, based first upon silver and after- 
ward upon both gold and silver, without any stable or uni- 
form ratio between them, or any clear understanding of 
their relation. In the bringing of merchandise from differ- 
ent parts and distributing it in Europe in exchange for 
other commodities there was a tendency to draw money of 
different coinages, more or less impaired in weight, to the 
trading centers and to produce an increasing volume of 
bills of exchange. There was need of more effectual means 
than the irresponsible private money brokers and dealers 
in exchange to accomplish the transfer and settlement of 
accounts in the miscellaneous money of the time, on some 
reasonable basis of equivalence. This gave rise to the 
precursors of the modern banks of deposit, of which the 
best example for the purpose of illustration was the Bank 
of Amsterdam, rather than the kindred institutions of 
Venice, Florence, and Genoa. 

This was established by the city to meet the needs of 



DEVELOPMENT OF MODERN BANKING 263 

commerce and suppress the disorders of private banking, 
and lasted for nearly two centuries. Its chief character- 
istic, like that of the early Italian banks, was receiving all 
kinds of specie and bullion on deposit and crediting to the 
depositor its value in " gulden/' according to the standard 
of the time, of which the silver riksdaler was the unit. 
These deposits could be withdrawn at will or could be as- 
signed or transf erred, and all bills of exchange of consider- 
able amount were paid through the bank by the transfer of 
deposits. It also bought and sold specie, but did not make 
loans, and its income was derived from a commission upon 
all transactions. Discounts in the modern sense were un- 
known. These transferable credits for actual coin or bul- 
lion deposited, representing the standard money of account, 
came to be known as " bank-money," as distinguished from 
the varied and fluctuating currency in circulation, and 
served as a stable medium in commercial transactions. The 
premium upon it indicated the depreciation of the moneys 
rated in it. 

In the early history of the Bank of Amsterdam any 
one credited with a deposit was entitled to draw specie on 
demand according to its value in " bank-money," which 
made the evidences of that money virtually redeemable in 
coin, giving it the character of a stable currency repre- 
senting the full value of standard coin of the Netherlands. 
The system was modified in the latter part of the seven- 
teenth century by the plan of making advances by a credit 
in " bank-money " upon deposits of specie of certain 
specific kinds to substantially the amount of its value, the 
depositor receiving a " recipisse " entitling him to with- 
draw it within six months upon returning the bank-money 
with which he was credited and paying ^ of 1 per cent 
interest. The deposit might be renewed at the end of six- 
month periods indefinitely, but in case of failure to 
redeem or renew it was forfeited to the bank. Mean- 



264 THE MODERN BANK 

time the practise of redeeming bank-money in specie on 
demand fell into desuetude and was no longer regarded 
as a right, and the method was adopted of buying and 
selling specie at fixed rates in " bank-money." 

The plan was to buy bank-money with specie when the 
premium w T as low and buy specie with bank-money when the 
premium was high, and so keep the fluctuation within cer- 
tain narrow limits. This was done through outside agents, 
and the extent and rates were determined by the bank and 
not by the demands of the community for either form of 
currency, which made it a departure from the principle 
of convertibility. In its early days the bank was required 
to hold in its vaults the kind of specie that it was bound 
to pay, and to the full value of the payments that could 
be called for, but its later advances and purchases pro- 
duced a dislocation that made its supply in a measure 
unavailable to meet the demand. Bank-money gradually 
lost its stability, and in the course of time, through the 
secrecy of its management, which led to irregularities, and 
to loans to the city and to the East India Company, the 
Bank of Amsterdam fell from its high estate and was 
found at last to be insolvent. 

The Banks of Antwerp and Hamburg were founded 
upon the same principle, and the latter had a continuous 
history from 1619 until the establishment of the imperial 
system of Germany. Its accounts were kept in " marks 
banco," equivalent to a half-thaler (37-J cents). Its notes 
represented only coin and bullion actually deposited and 
were payable in silver on presentation, but credits could 
only be transferred by the appearance of the depositor 
in person or by attorney. It made no loans and incurred 
no liabilities beyond the coin and bullion on deposit. The 
old system was continued for nearly two centuries without 
loss and served the purpose of the merchants in the 
most flourishing days of the " free cities." It was 



DEVELOPMENT OF MODERN BANKING 265 

only after the Napoleonic wars that modern banking 
methods were gradually adopted at Hamburg, and the 
venerable institution was merged in the lieiehsbank in 
1875. 

The commercial activity of England did not begin 
until that of Italy had declined and that of the Nether- 
lands had begun to wane, and it was near the end of the 
seventeenth .century before any important banking insti- 
tution was established. Such facilities for exchange as 
existed were provided by private concerns, and the gold- 
smiths of London received money on deposit upon which 
they paid interest and which they loaned out. All the 
conveniences of domestic and foreign exchange were pro- 
vided by private persons or firms. The currency was in 
a bad condition, and there was no regular system of tax- 
ation to provide revenues for the Government. The 
goldsmiths made advances to the Crown on interest-bearing 
securities, but after Charles II repudiated some of these 
obligations it became difficult to raise money on loans. 

In the time of William III and his war expenses on the 
Continent some means had to be devised for raising funds 
on the public credit and managing the increasing national 
debt. It was then that a canny Scotchman named William 
Patterson came forward with a proposal to establish a 
bank that should lend its capital to the Government and 
have the privilege of issuing on the securities " bills " that 
would constitute a legal-tender currency. After some 
opposition and delay the suggestion was substantially 
adopted in 1697, when " The Governor and Company of 
the Bank of England " was established by Act of Parlia- 
ment, or rather by what we would call a " rider " on a 
revenue bill. It was organized on a loan of £1,200,000 
to the Government and authorized to issue notes which 
should be a legal tender except at the bank itself, to deal 
in bullion and commercial bills, and make advances on 



266 THE MODERN BANK 

merchandise. It received the public funds on deposit and 
acted as fiscal agent of the Government, not only in placing 
loans, but to some extent in the collection of revenues from 
taxation, as well as making payments on official warrants. 
It was in close relations of mutual dependence with, the 
Government and was regarded as to some extent a political 
institution, which occasioned opposition from the Tory 
party as well as from the goldsmiths whose business it 
threatened to curtail. 

This was the Bank of England, which established in 
1732 the home in Threadneedle Street that it still occupies 
after passing through many trials and vicissitudes of 
fortune. Its charter has been renewed and its capital 
increased several times and its privileges have been varied 
from time to time, but the character of the institution has 
not been greatly modified, except by a gradual adaptation 
to the growing requirements of commerce. An early at- 
tempt was made to establish a land-bank in competition 
with it, but it failed. The South Sea Company attempted 
to rival it in 1717 as the manager of the national debt and 
secured the privilege from Parliament, but it was short- 
lived, collapsing under the weight of its speculative enter- 
prises. The intention Avas to give the bank a substantial 
monopoly by prohibiting any partnership or association of 
more than six persons from engaging in banking opera- 
tions. This did not prevent private partnerships and 
corporate organizations of six persons or less from carry- 
ing on banking operations or from issuing notes for cir- 
culation, though these were not a legal tender for debts. 
Neither did the terms of the Act of 1742 renewing the 
charter prohibit larger joint-stock companies from con- 
ducting a deposit and discount business, provided they did 
not kk borrow, owe, or take up any sum or sums of money 
on their bills or notes, payable at demand, or at any less 
time than six months from the borrowing thereof/' but 



DEVELOPMENT OF MODERN BANKING 207 

that privilege was then deemed essential to successful 
banking, and no such companies were formed for nearly 
a century after that. 

After the political upheaval in France and the events 
that led to the Napoleonic wars the Bank of England 
began to have serious trouble. The currency of the realm 
was in a bad state, the Government was exacting in its 
demands for advances, the importance of constant specie 
redemption of circulating notes was not appreciated, and 
coin was drained away to the Continent. In 1797 the bank 
was obliged to suspend specie payments, authorized to do 
so by the " Restriction Act," and did not resume until 1821. 
The first part of that long interval was one of great finan- 
cial confusion and distress, of enormous public expendi- 
tures, and the creation of the huge national debt of Great 
Britain. Many of the small banks failed, and " the bank " 
largely increased its note issues, which were still made a 
tender for debts, though not redeemable. A parliamentary 
inquiry led to the famous " bullion report " of 1810, the 
establishment of the gold standard and the present coin- 
age system in 1816, and a gradual bringing of order out 
of chaos. After 1826 joint-stock banks of more than six 
shareholders were permitted to do business in England and 
Wales beyond a radius of sixty-five miles from London, 
including the issue of notes, and on the renewal of the 
charter of the Bank of England in 1833 they were per- 
mitted within that distance, but without the privilege of 
issue. The first to take advantage of the liberty was the 
London and Westminster. Not until then did the great 
bank begin to establish branches, the first being at Man- 
chester, Gloucester, and Swansea. The Bank Act of 1844 
established the British system on its present basis. 

This divided the institution into a banking depart- 
ment and an issue department, the latter to be in charge 
of a committee appointed by the directors. What was 



268 THE MODERN BANK 

called " the currency principle " was then first applied. 
The average circulation at the time was about £14,000,- 
000, and this was taken as the amount that could be kept 
permanently afloat without being subject to demands for 
redemption. Securities to that amount were to be trans- 
ferred from the banking to the issue department, and as 
much gold coin and bullion as the former did not require 
for its regular operations, and an exact equivalent of these 
two deposits was to be issued in circulating notes. No 
addition could be made to this volume except on deposit 
of an equal sum in coin or bullion, and all notes were to 
be redeemed on demand. Out of regard for vested inter- 
ests the private and joint-stock banks could retain their 
existing circulation, but no addition could be made to it. 
It was intended that this should be gradually absorbed 
by the Bank of England, and it was provided that when- 
ever any other bank went out of business or surrendered 
any part of its circulation that institution could issue two- 
thirds of the amount withdrawn by depositing " securi- 
ties," but only on an order in Council authorizing it. This 
process of absorption has not yet been completed. The 
bank was required to make weekly reports to the Govern- 
ment and pay £180,000 a year for its privileges. This 
charge lias since been increased to £200,000. 

Scotland had a banking system with some peculiar 
features, established by its own Parliament before the 
union. The Bank of Scotland was in fact organized under 
an Act of 1695, before the Bank of England was in opera- 
tion but not before its plan had been formed and discussed. 
It was a private joint-stock company with a special charter, 
and was authorized to lend on real or personal security at 
not more than G per cent and to negotiate bills of ex- 
change. At first no deposits were received, but notes were 
issued to the amount of its capital, ranging i n denomina- 
tion from £1 to £100. It had a monopoly until 1716, but 



DEVELOPMENT OF MODERN BANKING 269 

this was not continued on the renewal of its charter at 
that time. The Royal Bank of Scotland was incorpo- 
rated by the holders of the public debt and began business 
in 1722. It began what has ever since been a distinctive 
feature of Scotch banking, the advancing of money on 
personal credits, the advances being made in notes of the 
bank. The British Linen Company of Edinburgh, formed 
in 1746 to promote the linen industry by lending money 
to the manufacturers, soon went into a regular banking 
business. Other banks were established from time to time, 
and at the time of the Bank Act of 1844 there were ten 
in existence, with numerous branches. 

The Scotch banks passed through the trying time 
at the close of the eighteenth and beginning of the nine- 
teenth century with very little strain. Their notes were the 
chief currency of the country, and though the issues were 
increased there was little call for their redemption. They 
were maintained at par while those of the English banks 
were depreciated and fluctuating, though within narrow 
limits on account of the strength of the Bank of England 
and the general confidence in it. In 1845 the " currency 
principle" was applied to the Scotch banks. They were 
allowed to retain the volume of notes then outstanding, 
£3,087,209, on the basis of securities, but all additions 
must be " covered " with coin, not more than one-fifth of 
which could be silver. The " authorized " or " uncov- 
ered " circulation was reduced to £2,676,350 by the failure 
of the Western Bank in 1857 and the City of Glasgow 
Bank in 1878 through bad management. This application 
of the " currency principle" somewhat modified the tra- 
ditional character of Scotch banking by restricting the issue 
of notes and the practise that had prevailed of paying 
interest on deposits, but the peculiar feature of making 
advances on personal credits continued. This consists in 
giving persons properly vouched for or of known probity 



270 THE MODERN BANK 

a credit to a certain moderate amount without making a 
deposit, and allowing him to draw upon it from time to 
time in the bank's notes, paying interest upon the amount 
taken while it is kept out and making payments by de- 
posit of the notes, thereby lessening the interest-bearing 
loan to that extent. 

Ireland depended upon private concerns for what were 
in those days regarded as banking facilities, such as ma- 
king advances upon various forms of security and negotia- 
ting commercial bills and bills of exchange, until 1783. 
Some of these private bankers issued promissory notes 
payable on demand, which served as currency of uncertain 
stability. " The Governor and Company of the Bank of 
Ireland " was established by an act of the Irish Parlia- 
ment in 1782 and began operations in Dublin the next 
year. It was organized by private shareholders and was 
not allowed to charge more than 5 per cent on loans and 
for discounts. Its circulation of notes was not restricted, 
and no other body corporate of more than six persons was 
to be allowed to " borrow, owe, or take up any sum or sums 
of money on their bills or notes payable at demand or at 
less than six months from the borrowing thereof," this 
language being borrowed from the English law. This did 
not put an end to the circulation of the small banking 
concerns. The Bank of Ireland suspended specie pay- 
ments from 1797 to 1821, and in the latter year, on an 
increase of its capital, surrendered its monopoly outside 
of a circuit of fifty miles from Dublin. Thereupon some 
English capitalists established the Provincial Bank of Ire- 
land, with its head office in London and various branches 
in Ireland outside of the fifty-mile limit. Later, other 
banks were established and there were six in 1845, when 
the same restriction was put upon note issues as was im- 
posed upon those of Scotch banks, and the monopoly of 
the Bank of Ireland within the fifty-mile circuit was 



DEVELOPMENT OF MODERN BANKING 271 

abolished. At that time the authorized circulation was 
£6,354,404, more than half of which belonged to the Dub- 
lin institution. In Ireland as well as Scotland the banks 
are permitted to issue one-pound notes, while in England 
no denomination less than five pounds is allowed. 

The first banking institution in France was founded 
by John Law in 1716 under the regency of the Duke of 
Orleans. It received a charter by letters patent, and was 
authorized to issue " bank crowns " redeemable in money 
of the weight and denominations of the day of issue, 
which was intended to keep them from fluctuating at a 
time when current coin was mixed and variable in weight 
and fineness. The bank was based upon sound principles 
and started well, acting as the fiscal agent of the Govern- 
ment, making loans on good security, discounting com- 
mercial paper, and redeeming its notes on demand, but 
Law was a promoter and speculator, and mixed up his 
banking concern with the Compagnie d' Occident, which 
was to exploit the resources of the Mississippi region. To 
strengthen his scheme he got the bank converted into a 
public institution as the Banque Royale, and issued a 
great volume of notes which became irredeemable. The 
story of that wild speculation and the collapse of the whole 
inflated financial " trust " is a familiar one, and France 
had nothing more to do with banks, except in the old- 
fashioned manner of private lenders and exchange dealers, 
until 1776, when the Caisse d'Escompte du Commerce 
was established during the ministry of Turgot, primarily 
to help the Government with its loans. It tried to serve 
the commercial community at the same time, but became 
too much involved in obligations of the Government and 
subject to its exactions, and it went down with other 
established institutions in the French Revolution. There 
is another familiar story in the " fiat-money " policy of 
those days, when France was flooded with " assignats." 



272 THE MODERN HANK 

'Two important commercial bunks were established in 
Paris after the Revolution and were doing a flourishing 
business when Napoleon became First Consul, but he 
desired a financial institution that should serve the Gov- 
ernment and be subservient to it, and in 1800 ho issued 
a decree establishing the Bank oi' France. This speedily 
absorbed one of the existing institutions, and the other 
was forced to give way to it when, in L803, the Bank of 
France received the exclusive privilege of issuing circu- 
lating notes in Paris. In L806 the bank was put on a 
permanent basis and brought into closer relation to the 
state. Its capital was increased to 90,00.0,000 francs, and 
its direction put in charge of a governor and two deputies 
appointed by the Government. Soon afterward its ex- 
clusive privilege oi' issuing notes was extended io all places 
in France in which it should establish branches. 

Al'tor the tall i){' Napoleon banks were established in 
the differenl departments of France^ some of which grew io 
importance, but they suffered severely in the financial dis- 
turbances attending the revolutions oi' L830 and ISIS. On 
both those occasions there was a suspension oi' specie pay- 
ments, and various devices were resorted to for the relief 
of financial stress. Discount-houses were established, 
Governmenl commissions advanced loans from the public 
treasury, and forced legal tender was given io the notes 
of the Bank of France. Aiter the final downfall of the 
Bourbon dynasty a monopoly of the issue of circulating 
notes was given to that institution and its branches, and 
the departmental banks were consolidated with if, their 
capital being added io its own. From that time it began 
to till the place in French banking that it lias occupied 
ever since. It was oi' great service to the Government, to 
the commercial community, and to the various corporate 
enterprises that developed in the last halt' oi' the nineteenth 
century. It went through severe trials at the time oi' the* 



DEVELOPMENT OK MODERN BANKING 273 

Franco-German War and the Commune, but came out 
triumphanl and was of immense service in floating Gov- 
ernment loans and otherwise aiding in the payment of 
the huge war indemnity to Germany. 

The course of development from the old condition of 
banking and facilitating commercial exchange came some- 
what later in Germany than in Great Britain and France. 
The first important institution was the Bank of Prussia, 
created by decree in the time of Frederick the Great 
(1765). Tt was strictly a state institution and under 
Governmenl control, though there were private share- 
holders. As in other cases of that day, the issue; 01 notes 
was considered the chief function of banking, apart from 
direct service to the state, and they were the main re- 
source in making loans. The practise; of making advances 
upon merchandise and pledge of securities as well as coin 
and bullion became a feature of German banking. The 
Bank of Prussia served as a financial agency of the Gov- 
ernment, and it was mainly for that that it was estab- 
lished. The same motive; was at the bottom of the 
development of similar institutions in other German 
states to supplement the private banking concerns. 

There was an irregular growth with the usual vicissi- 
tude- until the consolidation of the German Empire, when 
the foundation was laid for the present system. There had 
been differences of coinage in the various states and much 
monetary confusion, but in 1873 the gold standard was 
adopted and a new arid uniform currency system was 
founded with the; mark as a unit in place of the thaler. 
The French indemnity aided materially in carrying out 
the plans of reform, and the demonetization of silver* had 
a far-reaching effect. The Imperial Bank (Reichsbank) 
was established in L875 on the foundation of the old Bank 
of Prussia. While it was made a private institution in 
its ownership, it was kept under Government control and 



274 THE MODERN BANK 

regulation through a council of which the Chancellor of the 
Empire was president, one of the other four members be- 
ing appointed by the Emperor, and the rest by the Federal 
Council, or Bundesrath. There is a " Central Commis- 
sion " of fifteen members representing the shareholders, 
which has charge of most of the details of management. 

The development of banking in other countries of 
Europe presents few novel features. It grew out of the 
old devices of money-lending and dealing in the coin of 
different countries, and in bills of exchange, as the re- 
quirements of traffic increased, and out of the exigencies 
of governments as their expenses were enhanced and they 
needed to raise funds on their credit. Their special need 
was for agencies to make advances and manage loans, and 
in return they granted special privileges for the issue of 
paper currency. Sometimes they issued notes of their 
own as well, and it took a long time for governments and 
banks to learn that notes are not money and can be made 
to serve the purpose safely only by being always redeem- 
able on demand in coin. There was a banking institution 
in Vienna near the beginning of the eighteenth century 
similar in character to the earlier ones of Venice, Amster- 
dam, and Hamburg, but the National Bank of Austria 
was not founded until 1817. It was succeeded in 1878 
by the present Austro-Hungarian Bank. Through its 
branches the latter has conducted a large part of the bank- 
ing business of both countries which constitute the dual 
empire. Austria and Hungary grew together through 
struggle, and the united empire has had its troubles and 
losses. One of its greatest ills has been financial disorder 
and irredeemable " paper money," issued partly by the 
Government and partly by the bank, and only lately has 
it been getting on solid ground. A new monetary system 
on a gold basis was adopted in 1892, but the process of 
getting squarely upon it has been a slow and painful one. 



DEVELOPMENT OF MODERN BANKING 275 

Italy after the decline of its early commercial im- 
portance went through many political vicissitudes which 
are a matter of history, and through the experimental 
stage of modern banking, and emerged with three impor- 
tant institutions, the Bank of Italy, the Bank of Naples, 
and the Bank of Sicily, and many small local banks. But 
it has had a surfeit of " paper money " from time to time, 
from which it has not altogether recovered. Russia had 
the curse of irredeemable and depreciated paper currency, 
issued by the Government, long before it had a great bank. 
The Imperial Bank of Russia was not established until 
after the Crimean War, when the finances were in greater 
disorder than ever. It is peculiar in being in form a stock 
corporation in which the Government is the sole stock- 
holder, and therefore has the exclusive power of control 
and management. 

The Bank of Netherlands was established in 1814, 
after the failure of the old Bank of Amsterdam. It be- 
came and has continued to be the center of the banking 
system of Holland, having the exclusive right to issue 
circulating notes. While it was not a public institution 
and the state ceased to hold shares in it in 1864, the Gov- 
ernment exercised close supervision over it through an 
official commission, and the president and secretary were 
appointed by the Crown. Through its influence modern 
banking methods have been gradually assimilated in Hol- 
land. When Belgium became an independent kingdom 
with a guaranteed neutrality in 1830 there was one strong 
banking institution within its limits, the Societe Generale 
pour Favoriser l'lndustrie Nationale, which had the 
privilege of issuing notes and discounting commercial 
paper. It remained largely under Dutch influence, and, 
though it received the public funds on deposit, it refused 
to make advances to the Government, and as a result the 
Bank of Belgium was founded in 1835. The Government 
19 



276 THE MODERN BANK 

transferred its funds to the new institution, which got into 
trouble by the practise of making long-time loans while 
issuing notes payable on demand. It lost the public de- 
posits in 1842, when an arrangement was made with the 
Societe Generale upon the renewal of its charter, but both 
institutions became embarrassed in 1848, and in 1850 the 
National Bank of Belgium was chartered, with the exclu- 
sive privilege of issuing circulating notes and a prohibition 
of loans upon mortgages or the securities of industrial 
enterprises. This became the principal banking institu- 
tion of the kingdom and still holds that position. 

The State Bank of Sweden was founded in 1656 and 
was the first to issue notes in excess of the amount of specie 
held for their payment, thus giving them the character of 
a credit currency. It was made a public institution in 
1668, its entire capital being furnished by the state and 
its administration being in charge of a commission chosen 
by the Diet. It continues to hold that relation, but since 
1824 banking corporations have been authorized, con- 
sisting of not less than thirty shareholders, which may 
issue notes within a defined limit, redeemable in gold on 
demand. The Bank of Norway was founded in 1814, 
mainly for the encouragement of agriculture. The capital 
was raised by a tax upon landed property, and the land- 
owners became shareholders in proportion to their pay- 
ments. Notes were at first issued in loans upon land 
security, but their depreciation on account of the lack of 
provision for ready redemption in coin ultimately led to 
a reform of the system. The State Bank of Denmark 
was created in 1813 as a Government institution in order 
to establish an orderly financial system, but in 1818 its 
privileges, resources, and obligations were transferred to 
the newly founded National Danish Bank. The capital 
of the latter was raised by a tax upon real estate, the 
shares being held by the landholders in proportion to their 



DEVELOPMENT OF MODERN BANKING 277 

payments. No limit was fixed to its note circulation, but 
reserve requirements were gradually established. 

Prior to 1836 banking facilities in Switzerland were 
furnished entirely by private banking-houses, and there 
was considerable commercial development in Geneva and 
Basle, but in that year a bank of issue was established at 
St. Gall. At that time the issue of notes and their use 
in making loans were still considered the chief function 
of incorporated banking institutions. These multiplied 
in the different cantons with a purely local character until 
1875, when there were twenty-eight of them. Then a 
federal banking law was adopted under the revised con- 
stitution, which was superseded by a new act in 1881 
establishing the present system. 

In her days of enterprise and commercial activity 
Spain had a number of banks of the same type as those 
of Venice, Genoa, Amsterdam, and Hamburg, but they 
disappeared with her commercial decadence. A credit 
institution similar to that of other countries in the 
eighteenth century was established in Madrid in 1782 in 
the Bank of San Carlos, which continued in existence until 
1874. The Bank of San Fernando was founded in 1829, 
with certain special privileges at the capital and at places 
where it had branches. In 1856 this was converted into 
the Bank of Spain, and a new law was passed in regard 
to banks in general, of which there were several at that 
time specially chartered by the Government. Under this 
law only one was allowed with the privilege of issue in 
the same city, and those newly organized could put out 
notes to the amount of three times their capital but must 
keep a coin reserve of one-third the volume. The Govern- 
ment appointed the governor of the Bank of Spain and 
commissioners to manage the " independent " banks. In 
1874 the exclusive right of issue was conferred upon the 
former, and the others, then eighteen in number, were 



278 THE MODERN BANK 

required to surrender their circulation to it. By a revision 
of the law in 1891 the limit of circulation was fixed at 
1,500,000,000 pesetas ($300,000,000), against which a 
coin reserve of one-third was required, one-half of which 
must be in gold, but the bank was also required to make 
advances to the Government, and that involved it in diffi- 
culties. As Spain did not suspend the coinage of silver 
with the Latin union, its currency went to a silver basis 
and the notes of the bank depreciated heavily in relation 
to gold. It established branches which went far to crowd 
out the other banks, though they retained the ordinary 
functions of deposit and discount banking. 

Banking development in the rest of Europe, in what 
w^ere or still are colonies of European nations, and in other 
parts of the world, has been a mere extension or adapta- 
tion of the methods of the countries referred to above. A 
rapid survey of the present systems will be attempted in 
the chapters that follow. 



XXXIV 

THE BRITISH BANKING SYSTEM 

The Bank of England is the center of the banking 
system of England and Wales, and to a certain extent the 
central agency for those of Scotland and Ireland. It is 
the sole depository for the British Government, and is its 
fiscal agent. It is also the chief factor in effecting inter- 
national exchange and in controlling the course of gold 
with which international balances are settled. Notwith- 
standing its important public functions, it is a private 
corporation, controlled by its shareholders, who elect a 
board of tw T enty-four directors. By custom some of these 
are chosen each year, the changes being always made 
among the younger members, and it is an unwritten rule 
that none of them shall be in the banking business. They 
choose from their own number a governor for two years 
and a deputy governor for a like term, the latter usually 
becoming the successor of the former, and the offices being 
filled by rotation from the body of directors. The ex- 
governors constitute an executive council known as the 
Committee of the Treasury.. 

The notes of the Bank of England, of which the lowest 
denomination is £5, constitute the only paper currency 
for England and Wales except for the unabsorbed remnant 
of the circulation of the joint-stock and private banks, 
which amounts to less than £2,000,000, and are a legal 
tender in those countries, except in payments by the bank 
itself. As already stated, the issue department is entirely 

279 



280 THE MODERN BANK 

distinct from the banking department, and above the 
authorized limit described in the previous chapter, which 
by taking over the circulation of other banks has reached 
£18,450,000, all notes must be covered in full by coin or 
bullion, for which gold alone is used, though one-fifth in 
silver is legally authorized. The effect of this restriction 
has been a large use of coin in general circulation and a 
high development of the use of checks. The extent of the 
note circulation depends mainly upon the preference of 
the customers of the bank between them and coin. The 
banking department may obtain notes in any quantity by 
depositing coin and bullion with the issue department for 
the full amount, and can obtain coin by presenting notes 
there for redemption. It is immaterial to either depart- 
ment which are called for, as above the fixed limit of 
the securities the notes become practically coin certifi- 
cates. 

The currency system is not what is called " elastic," but 
owing to the moderate area of the country, its compactness 
and ample means of communication, the large use of coin 
and the general employment of checks, it works satis- 
factorily except in times of special stress, and then 
authority may be given for suspending the restriction upon 
the issue of notes upon securities. This has been exercised 
only three times since the Bank Act of 1844 was adopted. 
Much depends upon the circumstances and habits of the 
people of the country, and there is absolute confidence in 
the Bank of England, whose notes are as good as gold the 
world over. Any proposal to relax the restriction upon 
paper currency is generally discountenanced in England. 
The total of notes issued in August, 1903, was £52,406,- 
120, against which the issue department held £18,450,000 
in securities and £33,956,120 in gold coin and bullion. 
Of these notes £23,045,125 were in the reserve of the 
banking department. 



THE BRITISH BANKING SYSTEM 281 

The Bank of England had eleven branches in 1830, and 
the number has not been increased, but the joint-stock and 
private banks have multiplied in number, in resources, 
and in volume of business, though in recent years there 
has been a diminution in the number of banks, accom- 
panied by an increase of capital and extension of opera- 
tions. According to latest reports there are sixty-eight 
of them, with 4,146 branches. It is through these that the 
bulk of the banking of England and Wales is carried on, 
and the character of the business of deposit and discount, 
of making loans and advances of money, and of dealing 
in exchange is not materially different from that with 
which we are familiar in this country. There is an inci- 
dental way of supplementing bank currency more or less 
in vogue with which we are not familiar, through " check- 
banks." These take deposits and furnish books of checks 
filled out to various amounts making up the aggregate, 
less a small charge for the accommodation. Arrange- 
ments are made for paying these at different banks and 
they have a limited circulation. 

Apart from its own direct commercial business the 
Bank of England is a kind of bank of banks. There is 
no prescribed percentage of reserve either for it or for 
other banking institutions. It is left to the discretion 
of the managers, subject to their legal liabilities. The 
joint-stock and private banks are accustomed to have on 
hand only the cash deemed requisite for their current 
business and to keep regular deposits in the Bank of Eng- 
land. This puts upon that institution the burden of the 
banking reserve of the kingdom, as the banks of Scotland 
and Ireland make use of it to an extent in the same way. 
Accordingly it aims to keep on hand in cash as reserve 
approximately 50 per cent of its deposit liabilities. It has 
a way of protecting its reserve which is unknown in this 
country though it is followed to some extent on the Con- 



282 THE MODERN BANK 

tinent of Europe, and that is by raising its rate of discount 
when the reserve is too heavily drawn upon, which has 
the effect of restricting loans, and by lowering the rate 
when the reserve rises above what is regarded as a normal 
level. There is a weekly meeting of the directors on 
Thursday, at which a report of the condition of the bank 
is made and then the rate of discount is determined. It 
may remain the same for many weeks or it may be changed 
at short intervals, according to the state of the market, 
for it is by no means an arbitrary process. When there 
is a strong demand for money the general rate will 
naturally tend upward, and it is then that the reserve will 
be imperiled on account of the expansion of loans. The 
bank can not go much higher than the prevailing rate with- 
out sacrificing its own business, but can only fix a standard 
for that rate and give it stability. It can not put the rate 
too low without producing a demand upon its resources that 
will weaken the reserve. 

It will be well to note just here the function of the 
Bank of England in connection with the gold movement. 
London, on account of the vast extent of British commerce, 
shipping, and banking facilities in different parts of the 
world, has long been the center of international exchange. 
English bills of exchange are drawn and negotiated every- 
where and come home for payment, and are drawn in Lon- 
don to go everywhere in ail sorts of international settle- 
ments. Final payment of balances in gold is made to 
London and from London all the time. Involved with 
this commercial process is a continual transfer of capital 
in loans and investments to and from London. When in- 
terest rates are high there they attract capital and gold 
tends to stay at home and to flow in from foreign sources. 
If they are low there and more attractive to capital else- 
where, it tends to flow out. The Bank of England, as the 
main reservoir of the reserves and the chief agent in the 



THE BRITISH BANKING SYSTEM 283 

settlement of international balances, is the repository of 
most of the gold for the United Kingdom. From that it 
comes and into that it goes in the general process of dis- 
tribution, though the actual transfers are chiefly made by 
the great private banking-houses of London. 

When the supply is abundant and interest rates are low 
and exchange high, it goes out to meet the demand in set- 
tling balances elsewhere, and is distributed according to the 
pressure at different points. If it goes too fast and the re- 
serve sinks too much, the discount rate goes up and checks 
or reverses the current, and balances are made to wait by an 
extension of foreign credits. If it is necessary to draw gold, 
the rates go high enough to attract capital to London and the 
metal flows in. The process of transfer is effected by bills 
of exchange drawn by bankers to be met at the point from 
which gold is to move. There is another device for affect- 
ing the current. Gold is bought and sold by the bank and 
the price is varied slightly according to the relation of 
supply and demand. Gold is taken by the bank for the 
mint, and the mint price is 77 shillings 10| pence per 
ounce, but the depositor of bullion is paid in coin 77 shil- 
lings 9 pence, the difference being an interest charge for 
the time required for coinage. When bankers wish to 
obtain gold for export, and it is desirable to husband the 
supply or prevent exportation, a slight advance is made 
in the price, and when export is for commercial and finan- 
cial reasons desirable it is slightly lowered. By those two 
devices of raising and lowering the discount rate and the 
price of bullion the gold movement is controlled, and 
serves as the barometer of the state of the international 
exchanges. A moderate difference in sight-exchange rates, 
which move inversely to local interest rates, will turn the 
current one way or the other. If exchange goes sufficiently 
above par to cover the cost of transportation, interest, and 
insurance, and afford a slight profit in sending gold abroad, 



284 THE MODERN BANK 

it will be sent in preference to buying bills of exchange 
for foreign payments. 

The capital of the Bank of England is £14,553,000, and 
the market value of the stock has recently been about £325 
per share of £100. It has also what is called a " reserve 
fund," or surplus, of over £3,500,000. According to the 
latest statement at the time of writing (September, 1903), 
the issue department held £11,015,100 in Government se- 
curities and £7,434,900 in " other securities," or £18,450,- 
000 in all, and £33,956,120 in gold coin and bullion against 
an issue of notes of £52,406,120. Of these notes £23,045,- 
125 were in the reserve of the banking department and 
£29,360,995 were in circulation. At the same time the 
banking department held £2,145,427 in coin, £20,268,841 
in Government securities, and £24,810,212 in " other se- 
curities." The coin and note items constitute the reserve 
held against deposits. These at the same date consisted of 
£8,779,756 in Government deposits and £43,286,965 in 
" other deposits." The total assets and liabilities of the 
institution balanced at a little over £112,500,000, or about 
$562,000,000. 

While the Bank of England is such an important in- 
stitution as the central reserve agency of the system, the 
fiscal agent of the Government and almost the only source 
of a bank-note circulation and coin supply, it does a rela- 
tively small jpart of the banking business of the kingdom. 
The total paid-up capital of the other sixty-eight joint- 
stock banks of England and Wales with their many 
branches is only £47,536,311, though the authorized, or 
" subscribed," capital is £210,667,180, but they have a 
surplus, or what in England is called a " reserve fund," 
aggregating £37,118,569. In May, 1903, they had in- 
vested in securities £130,812,018, and their total deposits 
were £600,333,000, or more than ten times those of the 
Bank of England. The cash in hand and at call was £164,- 



THE BRITISH BANKING SYSTEM 285 

466,000, besides which they had in notes as reserve in the 
Bank of England £16,322,000. The aggregate discounts 
and loans of these joint-stock banks were over £387,000,- 
000, or about $1,900,000,000, those of the Bank of Eng- 
land at that time being less than £48,000,000. The 
aggregate of assets and liabilities was £717,730,076, and 
the outstanding notes of the twenty-three banks that still 
exercise their ancient privilege amounted to £1,923,155, 
of which £558,805 were in actual circulation. 

But these by no means exhaust the banking facilities 
that center in London as the " Clearing-House of the 
World's Commerce," and extend not only throughout the 
kingdom and its colonies but into the remotest regions 
that are penetrated by European trade. There are thirty 
colonial joint-stock banks that have London offices and do a 
large loaning and exchange business there, including three 
of those in Canada, thirteen in Australia and New Zealand, 
three in India, four in Africa, and several with business 
divided between different colonies. Besides, twenty-seven 
foreign banks have offices and agencies in the British 
metropolis, including prominent institutions on the Con- 
tinent of Europe, such as the Deutsche Bank, the Disconto 
Gesellschaft, and the Dresdner Bank of Germany, the 
Comptoir National d'Escompte of Paris, the Credit Lyon- 
nais, and the Imperial Ottoman Bank. They also include 
the Bank of Egypt, the Imperial Bank of Persia, and sev- 
eral specially organized for business in the East, in South 
America, Mexico, and the United States. This statement 
does not include the numerous private banking-houses, 
some of which have large resources and do a general bank- 
ing business. 

The clearings at the " Bankers' Clearing-House " in 
London, in August, 1903, were in the vicinity of £200,- 
000,000 weekly, varying considerably in different weeks 
on account of special settlement days. During the season 



286 THE MODERN BANK 

they had ranged from £152,000,000 to £206,000,000. At 
the five provincial clearing-houses, Manchester, Liverpool, 
Birmingham, Newcastle-on-Tyne, and Bristol, the weekly 
volume fell below £8,000,000. 

The methods of the Scotch banks have not changed 
materially since the restriction was imposed upon their 
note issues, except that they are less disposed to pay inter- 
est upon deposits and are consequently less used as banks 
for savings, and there is a greater use of checks on account 
of the diminished freedom of issuing notes, but the devel- 
opment of commercial transactions has not been so great 
as to produce any radical change. They still make ad- 
vances upon personal credits and loan upon a variety of 
securities, as well as discount commercial paper in the 
ordinary way, and deal in exchange. On account of the 
character of the system and the use of £1 notes, bank cir- 
culation has always been the chief currency of the country 
and commands universal confidence. This is due largely 
to the traditions and habits of the people. There are now 
eleven of these institutions, with 1,115 branches distributed 
over the country. Their aggregate paid-up capital is 
£9,316,070, but they have " reserve funds" aggregating 
£7,368,224. Their notes in circulation are about £8,000,- 
000; their aggregate deposits in May, 1.903, were £108,- 
861,000, cash in hand and at call £26,032,000. Their 
investments in stock and bond securities were £33,030,- 
616. They serve mainly the local business of Scotland, 
and the total of their discounts, loans, and advances accord- 
ing to latest reports were £71,487,456. 

In Ireland there has been no such growth either in 
population or industrial and commercial activity as to 
produce much change. The nine banks have 685 
branches; their paid-up capital amounts to £7,235,951, 
and the reserve funds to £3,909,000. The latest accessi- 
ble reports give their notes in circulation as £6,841,300; 



THE BRITISH BANKING SYSTEM 287 

deposits, £50,247,217; cash in hand and money at call, 
£11,819,190; bond and stock investments, £18,877,819; 
loans and discounts, £37,385,062 ; total assets and liabili- 
ties, £69,357,828. 

There is a joint-stock bank on the Isle of Guernsey 
with £50,000 paid-up capital, £45,000 reserve fund, £35,- 
100 in circulating notes, £247,255 in deposits, £56,559 
bond and stock investments, and £300,436 loans and dis- 
counts. It has a branch on the Island of Jersey. The 
Isle of Man Banking Company has seven branches, £30,- 
000 paid-up capital, £44,000 reserve fund, £27,900 cir- 
culating notes in 1903, £914,586 deposits, £136,641 cash 
in hand and at call, £440,303 invested in securities, and 
£417,163 loans and discounts. 






XXXV 

THE GERMAN SYSTEM 

When the Reichsbank of Germany was established on 
the foundation of the old Bank of Prussia, in 1875, the 
exclusive right to issue circulating notes in the future 
was granted to it, but there were thirty-two other banks 
which then had the privilege. It was provided that when- 
ever they abandoned it the volume of circulation given 
up might be added to that of the Imperial Bank, and only 
seven of these banks of issue now remain, so distributed 
in different states of the empire that they find it desir- 
able to retain the privilege for certain local advantages. 
Their total circulation is less than 200,000,000 marks 
or somewhat under $50,000,000, while that of the great 
institution at Berlin has latterly ranged in the vicinity 
of 1,200,000,000 to 1,500,000,000 marks. It has 310 
branches in different parts of the empire, and though its 
notes are not legal tender, they circulate all over the coun- 
try. They must be paid in gold on presentation at any 
branch. The other banks having notes outstanding are 
required to redeem them at their own offices, and at an 
agency at Berlin or Frankfort. They must accept each 
other's notes, but each can only pay out its own, except that 
the others may be paid to the banks issuing them, or in the 
cities where those banks are situated. This circumscribes 
their circulation. 

The system of security for bank-notes is a modification 
of that of the Bank of England, but has more of the ele- 



THE GERMAN SYSTEM 289 

ment of elasticity. There must be a reserve of " cash " 
equal to at least one-third of the circulation, imperial 
notes, of which there is an issue of 120,000,000 marks 
against the " War-chest " of gold coin kept at Spandau, 
and notes of other banks, as well as coin and bullion, be- 
ing counted as " cash," and the rest must be covered at 
all times by discounted paper not having more than three 
months to run. Though the cash funds are spoken of as 
a " reserve," they are merely a part of the general re- 
sources and are not directly pledged to the redemption 
of the notes. The latter are not even a first lien upon 
assets, but are merely a part of the general liabilities. But 
as the Reichsbank, like the Bank of England, holds a 
large part of the reserves of the other banks, it usually 
keeps in its vaults coin and bullion to the amount of two or 
three times the proportion to circulation required to be 
held. There is a limit of 450,000,000 marks to the amount 
which it can issue under cover of discounted paper, and 
all excess over that must be covered by the cash reserve, 
but in times of emergency the limit may be exceeded on 
payment of a tax of 5 per cent per annum upon the excess 
while it is outstanding. A report is required four times 
a month on fixed dates, and whatever excess of circulation 
over the authorized limit and not covered by cash is then 
found to exist is taxed ^ 5 §- of 1 per cent. This gives a cer- 
tain margin of circulation which will only be used in case 
of stress, but in general the volume is considerably below 
the legal limit. 

The Reichsbank has the same method as the Bank of 
England for protecting its general reserve of coin and 
bullion, which is made important by its relation to the 
other banks and the consequent fact that it is the custodian 
of the gold fund of the country. It raises and lowers its 
discount rate according to the demands made upon its 
resources, but the law gives it an advantage which the 



290 THE MODERN BANK 

Bank of England does not have in requiring the other 
banks to conform to its rate when it is as high as 4 per 
cent, and not to cut more than \ of 1 per cent under it 
when it is lower. There are a considerable number of 
independent banks of deposit and discount in the empire 
besides those that retain the privilege of note issue, some 
of them important institutions, and though the transfer 
of credits in making payments by means of checks is more 
highly developed than in France, it is still much less so 
than in Great Britain and the United States. Bank-notes 
are largely used in business transactions, and as the lowest 
denomination is 100 marks, or nearly twenty-five dollars, 
gold and silver coin is ordinarily employed in smaller pay- 
ments. The independent banks play an important part in 
promoting industrial enterprises, after the manner of our 
trust companies, and some of them have been accustomed 
to make advances on real-estate mortgages, as well as cor- 
porate securities. 

The Reichsbank is a private institution under the con- 
trol of the Government, as previously described, and acts 
as the fiscal agent of the empire in receiving and disburs- 
ing public money and in managing its financial obliga- 
tions. On the renewal of its charter in 1899 its capital 
was fixed at 180,000,000 marks, and it was required to 
accumulate a surplus of one-third as much more. Until 
this was accomplished 20 per cent of the profits in excess 
of a dividend of 3| per cent was to be devoted to that pur- 
pose, 60 per cent was to be paid over to the state, and only 
20 per cent was to go to the private shareholders. When 
the surplus had been fully made up, three-fourths of the 
profits above the regular dividend of 3^ per cent was to 
go to the state and one-fourth to the shareholders. The 
revenue from this source and the service to the Govern- 
ment are the return required for the privileges granted, 
and for the use of the public funds. 






THE GERMAN SYSTEM 291 

With a capital of about $45,000,000 the Keichsbank 
has a circulation that usually fluctuates between $280,- 
000,000 and $450,000,000 ; it holds in coin and bullion 
something like $240,000,000, while its liabilities on cur- 
rent accounts run at not much more than $150,000,000, and 
its discounts and advances are usually about $240,000,- 
000. Its notes are largely used in making loans and enter 
into the cash resources of the other banks, while it has to 
hold itself in readiness to redeem them on demand. This 
indicates in only a very general way the banking facilities 
of Germany and the relation to them of the Imperial 
Bank. 

Among the larger incorporated banks are the Deutsche 
Bank at Berlin, which has branches at Hamburg and 
Bremen and an office in London, a capital of about $40,- 
000,000; " reserve fund/' or surplus, of $13,500,000; 
current accounts and deposits, $182,000,000 ; bills re- 
ceivable, usually over $80,000,000; loans, $45,000,000; 
due on " current accounts," $75,000,000 ; securities, $25,- 
000,000; cash, $15,000,000. The Disconto-Gesellschaft 
has a capital of $37,500,000; surplus, $12,500,000; de- 
posits on " current accounts," $60,000,000 ; " acceptances 
against credits and securities," $25,500,000; various 
forms of loans and investments something over $25,500,- 
000. These figures, derived from balance-sheets at the 
end of 1902, indicate in a general way the banking ca- 
pacity of these institutions, which deal largely in public 
loans and participate in syndicate operations. The 
Dresdner Bank has a capital of $32,500,000, and total 
liabilities of about $143,500,000, in which deposits figure 
at $70,000,000, while in the list of assets are bills receiv- 
able, $28,500,000; loans, $25,000,000; securities, $10,- 
000,000; " current accounts," $55,500,000. There are 
several other banks of large resources, some of which loan 
on mortgage and do what we should call a " trust company 
20 



292 THE MODERN BANK 

business," and many " people's banks/' and private bank- 
ers. A characteristic of German banking is a large use 
of coin and notes of the Reichsbank, and large capital and 
surplus in proportion to deposits and loans. 



XXXVI 



THE FRENCH SYSTEM 



The leading characteristic of the French system of 
banking is the comparatively small development of the 
use of credit for currency purposes in the form of checks 
upon deposits and the large use of bank-notes supplied 
exclusively by one central institution. The only restric- 
tion the Government puts upon the circulation of the Bank 
of France, whose notes are a legal tender so long as they 
are redeemed in specie, is a maximum limit to the issue, 
which has been repeatedly advanced until it stands at 
5,000,000,000 francs. Xo security is required and no 
special reserve for either notes or other liabilities, though 
a very large amount of coin and bullion is held as a mat- 
ter of business policy. While notes as small as five francs 
are authorized, few are issued below fifty francs, and coin 
is generally used for small payments. The circulation 
rests entirely upon the credit and assets of the bank, and 
is generally six or seven times the amount of deposits, and 
from three to four times that of loans and discounts, but 
the specie is kept at about 60 per cent of all liabilities, 
including the circulating notes. France has never for- 
mally abandoned the bimetallic standard, though under a 
suspension of the coinage of five-franc pieces by the Latin 
Union it has for many years practically maintained the 
gold standard. The bank holds the bulk of the legal- 
tender silver, except the subsidiary coin in common use, 
and this approximates one-half the amount of the gold in 

293 



294 THE MODERN BANK 

its vaults. It makes use of its legal right to pay silver, 
which it must take when offered, to protect its gold, in- 
stead of frequently changing its discount rate. It exer- 
cises its option to pay silver by charging a small premium 
on gold as the alternative, when it is considered desirable 
to prevent the withdrawal of the latter. 

The result is the extensive use of bank-notes in all the 
transactions of business throughout the country. The 
bank maintains branches in all the departments of France, 
besides auxiliary offices, and under the Act of 1897 renew- 
ing the charter, the number of the former is to be in- 
creased, and the latter are to be multiplied until there 
shall be 377 " places bancables," instead of the 261 exist- 
ing at that time. This serves to carry the circulation and 
general operations of the bank throughout the country, 
but there are many other institutions, some of consider- 
able importance, engaged in a general banking business 
and using the legal-tender notes of the central institution 
as the bulk of their " cash." A characteristic of French 
banking is making a multitude of advances of small amount 
and discounting paper in sums ranging down to a few 
francs, as well as dealing with large financial transactions. 
A considerable part of the business of the Bank of France 
is rediscounting paper already taken by smaller institu- 
tions and bearing their indorsement, the profit of the latter 
being derived from a rate somewhat higher than the regu- 
lar one. 

While it receives the deposits of public money and acts 
as fiscal agent of the Government to a very important ex- 
tent, the Bank of France is not a state institution, though 
the governor and two deputies are appointed by the presi- 
dent of the republic and are removable by the Minister of 
Finance. Their tenure of office is practically " during 
good behavior," and has in fact been very stable. The 
predecessor of the present governor held the office from 



THE FRENCH SYSTEM 295 

1882 to 1897. There is a general council consisting of 
fifteen regents and three auditors (censeurs) chosen by 
the two hundred stockholders having the largest number 
of shares, but three of the regents must be taken from the 
treasury disbursing agents. Each branch has a certain 
amount of capital allotted to it, half of which is held by 
local shareholders, and is in charge of a board of directors 
appointed by the governor from a list made up in some 
cases by local shareholders and sometimes by those of the 
bank in Paris. The manager is appointed by the Govern- 
ment and his subordinates are generally sent from Paris, 
so that the administration is thoroughly centralized. But 
more than half the discount of commercial paper is made 
at the branches, showing a thorough competition with local 
institutions where they exist. This tends to keep the cir- 
culation well distributed. 

The capital of the Bank of France is 180,500,000 
francs. The other statistics are variable, but the relation 
of the different items is interesting as indicating the gen- 
eral character of the business. The latest report at this 
writing shows on the side of assets about 2,500,000,000 
francs in gold coin and bullion, 1,125,000,000 in silver, 
400,000,000 in Government securities, and 1,000,000,000 
discounts and advances, including advances to the Govern- 
ment. The liabilities are 4,250,000,000 francs in notes, 
162,500,000 Government deposits, and 420,000,000 pri- 
vate deposits. The total of resources and liabilities is about 
5,225,000,000 francs. A small tax is paid upon circula- 
tion according to volume outstanding, but the annual pay- 
ment can not be less than 2,000,000 francs, or about 
$400,000. 

The largest of the other banking institutions of France 
are the Credit Lyonnais, the Societe Generale, the Comp- 
toir d'Escompte, and the Credit Foncier. The last named 
does mainly a mortgage business. The others act largely 



296 THE MODERN BANK 

as financial agents of corporations and do what we call a 
" trust company business/' in addition to commercial bank- 
ing. Le Comptoir d'Escompte was virtually wrecked 
some years ago in supporting a copper speculation syndi- 
cate. The smaller banks do a commercial business in com- 
petition with the branches of the Bank of France, using 
the notes of that institution as cash and relying on their 
redemption for actual reserves, but in ordinary times no- 
body thinks of demanding redemption. To a consider- 
able extent their " bills " are rediscounted by the great 
institution at Paris, which is regarded as representing the 
financial power of the republic. 



XXXVII 

BANKS IN OTHER EUROPEAN COUNTRIES 

Austria-Hungary has been for some years engaged in 
restoring specie payments on the basis of the gold standard 
and a new coinage system, with the crown as the unit in 
place of the old florin. The crown is equivalent to about 
twenty cents, and is exchanged for florins at the rate of 
two for one, though the original coinage value of the 
florin was over forty-eight cents. The Government treas- 
ury notes are being gradually withdrawn and are sub- 
stantially at par. The Austro-IIungarian Bank has the 
exclusive right to issue circulating notes in the empire, 
but though it has 200 branches and agencies its general 
deposit business is comparatively small. Its capital is 
90,000,000 florins. There is no definite limit to its cir- 
culation, but it is required to hold a reserve of at least 40 
per cent in coin, and the uncovered issues can not exceed 
200,000,000 florins without payment of a 5-per-cent tax 
upon the excess. There are fifty-seven joint-stock and pri- 
vate banks of deposit and discount, and the postal savings- 
banks may receive deposits of not less than 100 florins 
subject to check, but the system of using checks is not 
highly developed in the empire. The practise of keeping 
accounts in crowns is hardly established, and all reports 
still use florins as a term of account. 

Italy still has Government notes in circulation and 
issues certificates on deposits of silver, but its currency 
consists chiefly of coin and the notes of the three banks of 

297 



298 THE MODERN BANK 

issue, the chief of which is the Bank of Italy, with a capi- 
tal of 300,000,000 lire or $60,000,000. This institution 
was formed in 1893 by the fusion of the National Bank of 
the Kingdom of Italy, the National Bank of Tuscany, and 
the Tuscan Bank of Credit. An ultimate limit has been 
set to the circulation by gradual reduction to 630,000,000 
lire for the Bank of Italy, 190,000,000 lire for the Bank 
of Naples, and 44,000,000 lire for the Bank of Sicily. 
This may be increased by covering the excess by deposits 
of coin and by advances to the Government. The notes 
are not a legal tender. The banks are under Government 
supervision, and the appointment of the director-general 
of the Bank of Italy is subject to the approval of the Gov- 
ernment. The deposits of these banks on open accounts 
are comparatively small and checks are little used. There 
is a large number of private banks and small institutions, 
known as " people's banks/' distributed over the kingdom, 
the latter making loans and advances on easy terms of 
security. The banking system of Italy is not highly 
developed, and has no other features of special interest. 
The latest statistics of the Bank of Italy show that it held 
during the summer of 1903 about $90,000,000 in specie 
and $14,000,000 in securities and credits, while its dis- 
counts and loans amounted to about $50,000,000. It had 
nearly $150,000,000 in circulating notes, which were at a 
discount, and only $7,000,000 in deposits on current 
account. 

The Bank of Spain is the center of the backward bank- 
ing system of that country. Its capital is $30,000,000, 
and it is authorized to issue notes to ten times that amount, 
and even that limit is exceeded. The latest statement at 
the time of this writing shows that, with about $100,000,- 
000 in silver and $72,500,000 in gold, the bank had out 
over $325,000,000 in circulating notes, which were de- 
preciated for lack of actual redemption. Its deposits were 



BANKS IN OTHER EUROPEAN COUNTRIES 299 

about $125,000,000, and its loans and discounts $210,- 
000. It has a monopoly of note issues, and other banks 
depend upon it for currency. 

The Bank of Portugal, with a capital of $14,500,000, 
has also the exclusive privilege of issuing paper currency, 
and is the center of the banking system of the country. 
It is managed by a governor appointed by the royal treas- 
ury and ten directors chosen by the shareholders. Recent 
statistics are not at hand, but its circulation is usually 
from three to four times the capital and is secured by a 
specie reserve of about 20 per cent, while the current 
deposit accounts are relatively small and the loans less 
in amount than the capital and hardly one-fifth of the cir- 
culation. The latter is largely the currency in use and 
the cash of the small banks. 

The National Bank of Greece has a capital of 20,000,- 
000 drachmae, or about $4,000,000, and a surplus of half 
as much more, but its notes are three times as much as 
these two sums combined, and its deposits somewhat less 
than the circulation. It has struggled long with irredeem- 
able paper and depreciated Government obligations. The 
Ionian Bank has its chief office in London. Its paid-up 
capital is $1,577,500, and it keeps about $1,000,000 in 
notes in circulation. Its cash holdings are about $375,- 
000, its ordinary deposits $2,750,000, and its loans, ad- 
vances, etc., over $4,000,000. It holds about $575,000 
in general securities, and its assets and liabilities are about 
$6,250,000. 

The principal bank of Turkey is the Imperial Otto- 
man, which w r as established in 1863 by English and 
French capital. Though its authorized capital is $50,- 
000,000, only $25,000,000 has been paid up, but it has a 
surplus of $3,500,000. It maintains a number of branches 
and has a circulation of about $4,500,000, secured by a 
cash reserve which must be kept at one-third of the volume. 



300 THE MODERN BANK 

Its total " cash and money on call " at the time of the 
latest accessible report was about $15,500,000. It had 
deposits of over $35,500,000, and loans and advances some- 
what below that figure. It held about $16,000,000 in- 
vested in securities. It is managed rather on the English 
plan, and is a comparatively " up-to-date " institution. 
Roumania, Bulgaria, and Servia have each its national 
bank of issue, which does a discount and deposit busi- 
ness, but they are slow 7 in coming into line with modern 
methods. 

The Bank of Belgium is the center of the banking 
system of that country. Its capital is $10,000,000, and 
its circulation about $25,000,000. It is required to hold 
specie to one-third of the amount of its notes and other 
demand liabilities. The notes are a legal tender so long as 
they are redeemed in coin on demand. The latest reports 
show deposits equal to hardly one-tenth of the circulation, 
the volume of which is greater than that of the loans and 
discounts. 

The Bank of the Netherlands has a capital of $6,400,- 
000, and issues notes without any fixed limit, except that 
it is required to hold a specie reserve of 40 per cent of 
notes and deposits. According to recent reports, its cir- 
culation was nearly $20,000,000 while its deposits were 
less than $100,000, and of $10,500,000 in specie more 
than $6,500,000 were silver. Its discounts and advances 
at the same time were less than $10,000,000. It is under 
close Government supervision, and is more a fiscal agent 
and currency-issuing institution than a commercial bank. 
The general banking of Holland is done largely by small 
banks and private banks using the notes of the Bank of 
Netherlands as the bulk of their cash. 

The peculiar features of the Russian system is its one 
great bank of issue owned and controlled by the Govern- 
ment, which furnishes its entire capital and directs its busi- 



BANKS IN OTHER EUROPEAN COUNTRIES 301 

ness, using it largely as its own fiscal agent. Up to 600,000,- 
000 rubles 50 per cent of its circulation must be covered by- 
gold, and beyond that limit the full amount of the excess 
must be so covered. It also holds a large amount of Govern- 
ment securities in its issue department, and gold certificates 
are issued on deposits of the metal. It keeps current 
accounts with private persons and commercial establish- 
ments, but there are many joint-stock and private banks 
in the empire, and a number of mortgage banks ' that 
make loans on real-estate security. The Imperial Bank 
has a capital of $27,500,000, and the volume of its cir- 
culating notes in the summer of 1903 was nearly $290,- 
000,000, but it held about $370,000,000 in gold and $45,- 
000,000 in silver. It keeps a considerable account with 
the public treasury and has private deposits of $240,000,- 
000 and more, its loans being considerably below that 
amount. Holding the specie reserve of the empire and 
issuing its paper currency is regarded as one of its most 
important functions. It is a source of considerable 
revenue to the Government apart from acting as its fiscal 
agent in negotiating loans and financing its industrial and 
railway enterprises. 

Sweden, Norway, and Denmark constitute the Scan- 
dinavian Union, with tha gold standard and the krone 
as the unit of value, worth about twenty-seven cents. The 
Bank of Sweden, which is owned by the state and man- 
aged by officers chosen by its legislature, issues legal-tender 
notes to the authorized limit of 30,000,000 crowns, and 
as much more as may be covered by a metallic reserve and 
credits in foreign banks, but it must in any case hold at 
least 10,000,000 crowns in gold. Over twenty other banks 
issue notes which are not legal tender and must be redeemed 
in gold on demand, like those of the state bank. The limit 
of the circulation is the amount of capital invested in se- 
curities, one-half their total credits and such metallic re- 



302 THE MODERN BANK 

serves as they may hold in excess of 10 per cent of their 
capital, which they must keep in gold in any case. 

The Bank of Norway is the sole bank of issue in that 
country. The state is a shareholder, and the governing 
board of fifteen is chosen by the Storthing, the adminis- 
tration being placed in the hands of five directors at the 
central bank and three at each branch, also named by the 
legislative body. Its notes are a legal tender within the 
kingdom and are limited only by the requirement of a 50- 
per-cent reserve, one-third of which may consist of credits 
in foreign banks. Norway has a bank specially incorpo- 
rated to make loans on real-estate mortgages, and in 
Sweden private banks do a business of the same kind. 
There are thirty provincial banks in Norway which main- 
tain a central bank at Christiania to serve the purpose of 
a clearing-house. 

The National Bank of Denmark issues notes which 
are a legal tender for debts and the only credit currency 
in the country. It must hold a metallic reserve of at least 
three-eighths of the outstanding volume, not less than 12,- 
000,000 kroner (crowns) of which must be in gold coin. 
There are numerous other institutions doing a commercial 
banking business. 

European banking systems have been extended into 
the colonies of European countries or imitated by them, 
and the banking of the rest of the world is done largely by 
companies chartered in Europe. The African Banking 
Corporation, the Bank of Egypt, the Bank of Calcutta, 
the Bank of Australasia, the Chartered Bank of India, 
Australia, and China, the Hongkong and Shanghai Bank- 
ing Company, the British Bank of South America, and 
many others, are practically English concerns and are 
managed from London with officers and agencies else- 
where. There is nothing distinctive about their methods. 
The banks of Japan are modeled on the English system. 



XXXVIII 

THE OLD UNITED STATES BANKS 

In the colonial days in America there was great 
scarcity of money, and the English colonies which after- 
ward became the United States undertook to supply cur- 
rency by emitting their own " bills of credit/' often 
badly secured and soon discredited for lack of redemption 
on demand. It was to supply the same need that the first 
banks were established, the earliest being in Massachusetts 
in 1714. It was founded on land security, its notes being 
secured on real estate and other " imperishable commodi- 
ties. " It was under no legal regulation, was badly man- 
aged, and came to grief. There were other crude experi- 
ments in what was then called banking in the colonies 
before the Government of the United States was estab- 
lished, the chief purpose of which was to furnish " paper 
money/' which was put out in the purchase of property, 
or in loans secured in a variety of risky ways. Banking 
in the modern sense was hardly known. After the Con- 
stitution was adopted banks were organized in the different 
States, and the first Secretary of the Treasury, Alexander 
Hamilton, promptly set about having a United States Bank 
founded, to be a " regulator of the currency/' a depository 
for public money, and a fiscal agent of the Government. 
In accordance with his recommendations in a formal 
report a charter was granted by Congress in 1791 for a 
term of twenty years. 

303 



304 THE MODERN BANK 

The first United States Bank had a capital of $10,000,- 
000, divided into 25,000 shares, of which the Government 
was to hold one-fifth, paying for them in ten annual instal- 
ments, with interest at 6 per cent. The rest were open 
to general subscription and were to be paid for, one-fourth 
in specie and three-fourths in Government obligations, 
bearing interest at 6 per cent. The voting power was 
peculiarly distributed, one vote being cast for one share, 
one for the next two shares, and so on in arithmetical pro- 
gression, but no shareholder could have more than thirty 
votes, and foreign holders, who came to be the majority, 
could not vote by proxy at all. The bank could not hold 
real estate, except for the accommodation of its business, 
nor lend on mortgage security. It could not become in- 
debted to a greater amount than its capital, but deposits 
were not reckoned among its liabilities. This was the only 
limitation upon its issue of notes, but their volume was 
usually only about half its capital. It was subject to in- 
spection by the head of the Treasury, and its notes were re- 
ceivable for public dues so long as they were kept payable in 
coin. It was allowed to establish branches, and had one in 
each of the leading cities of the time, the main institution 
being in Philadelphia. It was indubitably successful, and 
when Secretary Gallatin first recommended a renewal of its 
charter in 1809 he reported that the Government had made 
a profit of $671,860 by the sale of its shares, besides re- 
ceiving dividends at an average rate of 8f per cent. At 
that time 18,000 of its shares were held abroad, but the 
exclusive power of management was in the hands of the 
holders of the 7,000 who resided in the United States. Its 
loans and discounts amounted to $15,000,000, its deposits 
to $8,500,000, it held $5,000,000 in specie, and its out- 
standing circulation was $4,500,000. The constitution- 
ality of the charter had always been questioned, and there 
was a bitter political contest over its renewal, which re- 






THE OLD UNITED STATES BANKS 305 

suited in defeat. The bank was put in liquidation, and 
shareholders received $434 for each $400 share. 

The Government had then to rely for financial aid and 
service upon the State banks, and the War of 1812 brought 
trouble and disorder, including a suspension of specie 
payments, except in New England. An agitation began 
in 1814 for a charter for a new Bank of the United States. 
There was much debate in Congress, and a bill was passed 
which was vetoed by President Madison in January, 1815, 
but in December of the same year he suggested a national 
bank as a means of putting an end to the financial dis- 
order. A somew T hat different bill was passed, and ap- 
proved by the President, April 10, 1816. The charter 
was to run twenty years, and differed little in its main 
features from that of the first bank, but the capital was to 
be $35,000,000, one-fifth subscribed by the Government, 
and paid either in cash or its own obligations bearing 5 
per cent interest. Payment was made with a " stock note," 
which was not fully paid off until 1831. It was required 
that public money be deposited in the bank " unless the 
Secretary of the Treasury shall at any time otherwise 
order and direct." Private shares were to be paid for, 
one-fourth in coin and the rest either in coin or Govern- 
ment securities, and in three instalments, 30 per cent at 
the time of subscription, 35 per cent in six months, and 
35 per cent in one year. 

The early history of the bank was clouded by scandal, 
mainly on account of failure to collect the stock payments 
as provided and making loans on security of the shares 
even before they were fully paid for, but it was saved from 
disaster after a congressional investigation in 1819 by its 
new president, Langdon Cheves, of South Carolina, who 
borrowed $2,500,000 in Europe, reformed the manage- 
ment, and put the institution on a sound basis. During the 
next ten years it commanded general confidence and was 



306 THE MODERN BANK 

regarded as a solid and valuable institution, both to the 
Government and to the country. Then began an attack 
upon it which brought it into politics and wrought its 
ruin. 

Nicholas Biddle had succeeded Cheves as president of 
the bank in 1823, and in 1829 it had twenty-five branches 
and was in a prosperous condition. The trouble began with 
an attack upon the branch at Portsmouth, N. EL, which 
was under the charge of Jeremiah Mason, who had been 
defeated for the United States Senate by Levi Woodbury. 
Mason gave offense by his strict management, and was 
charged with partiality toward the opponents of the ad- 
ministration of General Jackson. There was a political 
intrigue to secure his removal, but Biddle sustained him 
with injudicious zeal, and Jackson's " kitchen Cabinet " 
fomented the idea that the bank and its management were 
hostile to the administration and working against it and 
its friends. The result was that the President, in his mes- 
sage to Congress in December, 1829, to the surprise of 
everybody who was not in his personal confidence, declared 
that " both the constitutionality and the expediency of the 
law creating the bank are well questioned by a large por- 
tion of our fellow citizens ; and it must be admitted by 
all that it has failed in the great end of establishing a uni- 
form and sound currency." This precipitated a contest 
against the renewal of its charter, in which Henry Clay 
took a leading part as its defender, and it was made an 
issue in the campaign of 1832. The President had Con- 
gress against him, as well as a considerable part of his 
official Cabinet, including the Secretary of the Treasury, 
Louis McLane. A bill renewing the charter of the bank was 
passed in the summer of 1832 and promptly vetoed. Bid- 
dle again displayed his injudicious zeal in defending the 
bank and intensified the conflict for its destruction. At 
the election in November Jackson won an overwhelming 



THE OLD UNITED STATES BANKS 307 

triumph, and Clay, who was the candidate against him, 
was "snowed under." 

There was no hope now of securing a renewal of the 
charter, which was to expire in 1836, but Jackson deter- 
mined to administer another blow by causing the public 
deposits to be removed. Biddle furnished him a pretext 
by an act that savored of bad faith toward the Govern- 
ment. He had been notified by the Secretary of the 
Treasury that the Government wished to apply $9,000,000 
of the $12,000,000 which it had on deposit to the payment 
of its outstanding 3-per-cent obligations, which were held 
largely abroad. The president of the bank agreed to take 
the necessary steps to get possession of the bulk of these, 
but sent one of the directors to London to make a private 
arrangement with the Barings for postponing payment of 
$5,000,000 of the debt, as money was worth 7 per cent to 
the bank, while the interest on the bonds was only 3 per 
cent. This became public and enraged the president. 

As Secretary McLane was unwilling to direct the re- 
moval of the deposits to certain State banks, he was trans- 
ferred to the State Department in the spring of 1833, and 
William J. Duane was put in his place. The House of Rep- 
resentatives declared by resolution that the deposits could 
be safely left in the bank, and Duane proved averse to obey- 
ing the behest of the President, who wrote him a long let- 
ter on the subject of ordering a removal of the deposits, 
or rather of making future deposits in State banks and 
gradually drawing out the funds in the national institu- 
tion for disbursements. Duane was not a believer in the 
bank, but he regarded the right to the deposits as part of 
a contract with the Government and doubted the author- 
ity to place them elsewhere. He declined either to order 
their removal or to resign, and was himself removed, At- 
torney-General Roger B. Taney being put in his place and 

afterward rewarded for his subserviency by being ap- 
21 



308 THE MODERN BANK 

pointed Chief Justice of the Supreme Court. The de- 
posits were removed and the President was censured by a 
resolution of the Senate, which was afterward expunged 
from the record. After the expiration of its national 
charter the Second Bank of the United States obtained a 
new charter from the State of Pennsylvania, but it was 
badly managed and fell into disaster, and after two 
temporary suspensions it collapsed in 1841. The process 
of liquidation lasted fifteen years, and though its credit- 
ors were finally paid in full the shareholders recovered 
nothing. 

The ruin of the United States Bank was wrought by 
politics in an exciting period and was started in a miser- 
able local intrigue to discredit the management of an in- 
significant branch, when it was at the height of its 
prosperity and usefulness. In 1835 its loans amounted 
to $51,808,739, deposits to $11,756,905, circulation 
$17,339,797, and it held $15,708,369 in specie. For 
fifteen years it had been well managed and profitable, and 
had helped to maintain financial stability. Apart from its 
direct service to the Government, its business consisted 
chiefly in discounting commercial paper and dealing in 
domestic and foreign exchange. Depositing in State banks 
did not work well, and after their suspension in 1837 
President Van Buren recommended that public funds be 
kept exclusively by public officers, and only specie be re- 
ceived for Government dues. A bill to establish what was 
called the " independent treasury system," after several 
defeats, was finally enacted in 1840, but when the Whigs 
came into power the next year the law was repealed. Two 
bills providing for a national bank were afterward suc- 
cessively passed and vetoed by President Tyler. The in- 
dependent treasury system was finally established by an 
Act of Congress in 1846, and from that time down to the 
civil Avar the Government made its collections and dis- 



THE OLD UNITED STATES BANKS 309 

bursements in specie only and kept its funds in the 
custody of its own officers. As its receipts and expendi- 
tures were relatively small in those days, and any balance 
on hand was insignificant, as the Treasury had no con- 
nection with the hanking system, which was wholly one 
of State banks, and as the Government supplied currency 
only by coining money, there was no disturbance of credit 
or of the money market occasioned by the financial opera- 
tions of the Government. 



XXXIX 

THE OLD STATE BANKS 

State banks were established even before the first 
United States Bank was chartered, and they increased in 
number and variety in the different States until the time 
of the civil war, gradually working through confusion 
toward a sound system, which might have become uniform 
even if it had not been ultimately nationalized. In their 
early history banking principles had not become settled 
and were imperfectly understood in this country. The 
business was for a long time in an experimental stage. The 
country was little developed, there was a lack of accumu- 
lated capital, and coin was scarce. The main purpose of 
banks was supposed to be to supply currency in the form 
of circulating notes to serve as " paper money," and secu- 
rity by constant redemption in specie was too little re- 
garded. 

The earliest and most rapid development was in Massa- 
chusetts, which was industrially and commercially the most 
advanced of the States. The Bank of Massachusetts was 
chartered in 1784, and was followed by several others in 
the course of the next twenty or thirty years, the first law 
to regulate banking being passed in 1805. Each institution 
was established under a special charter subject to very loose 
regulation, and the granting of charters was for some time 
the occasion for political favoritism. The principal re- 
strictions applied to the payment of the capital in coin and 
the limitation of liabilities to twice the amount of capital. 
Among liabilities the notes but not deposits were included, 
310 



THE OLD STATE BANKS 311 

and that was the sole restriction on the volume of notes, 
whose security was only the assets of the banks. They were 
generally issued in making loans on promissory notes or 
such commercial paper as was then used in making pay- 
ments, and they constituted the bulk of deposits. Checks 
in the later form were not used, and deposits were not con- 
stituted by credits in the present way. Bank " bills " were 
mostly used in receipts and payments, in loans and deposits, 
and they formed the bulk of " current money." Little 
thought was given by people in general to their redemption 
in coin. Those of different banks circulated together, and 
not much attention was paid to the difference. It was 
hardly considered the proper thing, except among banks 
themselves, and not among all of those, to ask or expect 
their redemption unless coin was required for some specific 
purpose. 

The only feature of New England banking deserving 
of particular attention is what is known as the Suffolk 
Bank system of redemption. After banks had considerably 
multiplied and had issued notes which wandered about at 
will, passing from hand to hand regardless of their origin 
and careless of redemption, Boston found itself flooded 
with " bills " which were not redeemable there and against 
which the local banks discriminated in receiving deposits, 
so as to drive them to a discount. This made them circulate 
all the more, and drove in the notes of the Boston banks, 
as the cheaper currency will always displace the dearer. 
To remedy this the Suffolk Bank devised a means of com- 
pelling the redemption of these notes at par in Boston. The 
country banks refusing to provide for this, the Suffolk 
adopted the plan of gathering up the notes and sending 
them home for redemption. Then it proposed that the 
different banks keep a permanent cash deposit with it and 
a sufficient margin above this to meet the current redemp- 
tion of their notes, in return for which it would attend to 



312 THE MODERN BANK 

the redeeming business. Six other Boston banks joined 
with it in putting the plan in operation, and in spite of 
some resistance the combination, which was dubbed the 
" Holy Alliance " and the " Six-tailed Bashaw/' succeeded 
in establishing the scheme of redemption. It was begun 
in 1824 and lasted till the time of the civil war, though 
for a while there was another redemption agency in Boston, 
organized for the special purpose and called the Bank of 
Mutual Redemption. Under the Suffolk Bank system, and 
a law passed in 1845 providing that no bank should pay 
any notes but its own over its counter, constant redemption 
was kept up and all notes were maintained at par, each 
bank having its own legitimate proportion of the circula- 
tion. 

The Suffolk Bank was practically a clearing-house 
for New England bank-notes. In 1857 there were 504 
banks in its system, and it employed seventy clerks in as- 
sorting " bills " and attending to their despatch. Though 
the circulation of all the banks was less than $40,000,000, 
the redemptions amounted to $400,000,000 a year. The 
system was never established or regulated by law, and it 
was not until after the panic of 1857 that the banks of 
Massachusetts were required to hold a specie reserve of 15 
per cent against both circulation and deposits. By that 
time most New England banks were on a fairly secure basis, 
and there had been a large development of commercial bus- 
iness in which they constituted an important agency. 

State banking began in New York with the Bank of 
New York, which started without a charter in 1784, and in 
the establishment of which Alexander Hamilton was con- 
cerned. It was regarded as a Federalist institution, and 
Republicans could not get a bank charter from the powers 
that then were. The Bank of New York was regularly 
chartered with $900,000 capital and limited liability of 
stockholders in 1791. Soon after, certain Rejniblicans 






THE OLD STATE BANKS 313 

secured a charter for the Manhattan Company to supply 
water to the city, but with the privilege of using its surplus 
funds in any " moneyed transactions " not inconsistent 
with the Constitution and laws. This was a shrewd device 
of Aaron Burr, under which the company established a bank 
that exists unto this day. Other bank charters were granted 
from time to time to those in political favor, and obtaining 
them became a source of scandal and corruption for many 
years. The banks were not materially different in the 
character and methods of business from those of New Eng- 
land, but in the course of time two methods of securing 
notes were adopted which were unknown there. One was 
known as the " safety-fund system/' and the other was 
adopted under the free-banking law, which in 1838 put 
an end to the old plan of granting special charters and lim- 
iting them to those who could secure the favor of the Legis- 
lature. 

The safety-fund system was started in 1829 by a leg- 
islative act recommended by Governor Van Buren. Under 
it each bank paid a tax of -J of 1 per cent of its paid-up 
capital into a " bank fund " in the custody of the Comp- 
troller, until it should amount to 3 per cent of the capital, 
and whenever it w 7 as depleted it was to be restored to that 
limit by the same process. This fund was to secure not 
simply the redemption of the notes of failed banks, but the 
payment of all their liabilities, being resorted to at first 
only when their assets were exhausted. After some ex- 
perience w 7 ith failures and the depreciation of notes, it was 
provided that two-thirds of the fund might be used at once 
for the redemption of notes, the rest being reserved for the 
benefit of other creditors and the fund being restored from 
assets in the final settlement, so far as they would go. In 
1842 the notes were made a first lien upon the entire fund, 
but it was still liable for other debts, and the Constitution 
of 1846 made note-holders preferred creditors in all cases 



314 THE MODERN BANK 

of the failure of banks. The safety-fund plan of securing 
bank circulation was not worked out to perfection in New 
York before the civil war came to produce radical changes. 
Properly the fund should have been raised by a contribu- 
tion proportioned to circulation instead of capital and used 
only to redeem the notes of failed banks. It is calculated 
that if that method had been pursued a tax of ^ of 1 per 
cent on circulation would have been sufficient to provide 
for all failures that occurred while the system existed, 
making the notes of all the banks secure. 

The political contest waged over the granting of bank 
charters and the alleged " monopoly " allowed to friends 
of the party in power led to an " antibank " movement, in 
which a faction of Democrats dubbed " Locofocos " finally 
joined with Whigs and gained control of the Legislature. 
This resulted in a " free-banking " law in 1838, under 
which anybody could set up a bank and issue notes on de- 
positing securities with the State Comptroller. These 
might consist of stocks of the United States, or the State of 
New York, or those of any other State approved by the 
Comptroller, made equal to 5-per-cent stock of New 
York, or mortgages on real estate worth double the amount, 
exclusive of improvements, and bearing 6 per cent interest. 
Not more than one-half could consist of mortgage funds. 
These securities were to be sold to redeem notes in case of 
the bank's failure. After some failures in which the secu- 
rities did not realize enough to pay the notes at par the 
bonds of other States were excluded, but failures continued 
in which the securities fell short of redeeming the notes. 
Too many banks were organized and the demand for bonds 
advanced their price and encouraged their issue. After- 
ward they depreciated, especially when failures occurred 
and it became necessary to sell them. The system worked 
badly, mainly on account of the uncertainty of the securi- 
ties and bad management of the banks, but it was widely 



THE OLD STATE BANKS 315 

imitated in other States, where the effect was still worse. 
It, however, contained the germ of our present national 
system. Its principal fault, in case the securities were 
sound and proper management and supervision were exer- 
cised, was lack of elasticity in the issues, which could only 
be expanded by investing in additional bonds and con- 
tracted by withdrawing them. 

Illinois and other Western States had a disastrous ex- 
perience with " free banking/' but there was a lack of 
proper regulation and of capable management. There was 
difficulty in securing the paying-up of capital in specie, 
even when it was required by law. In some cases a first 
instalment was paid, and then notes were issued in return 
for the " stock notes " of subscribers and taken back in 
payment for more shares. Sometimes the same specie was 
transferred from one new bank to another to answer the 
technical requirements of " paid-up capital." There was 
seldom much kept on hand, and in many cases there was no 
pretense of redeeming notes in coin. The securities required 
were often of the most dubious character, and there was 
much unscrupulous evasion of such requirements as the law 
laid down. There was a mania for issuing " paper money," 
and many banks did no legitimate business, but issued notes 
for the interest to be obtained in loaning them and to be 
collected on the bonds deposited for their security, which 
were in fact sometimes paid for with the notes they were 
intended to secure. The notes could generally be kept in 
circulation without any demand for redemption until fail- 
ure came, when they depreciated and sometimes became 
worthless, the proceeds of the deposited securities never 
reaching them. In Michigan banks were established in the 
wilderness with practically no capital and little available 
security for notes, and these came to be known as " wild-cat 
banks." Hardly a Western or Southern State escaped the 
infection, and it even spread in Pennsylvania, though Phil- 



316 



THE MODERN BANK 



adelphia had one famous institution in the Bank of North 
America. It was first chartered by the Continental Con- 
gress in 1782, and afterward by the State, and exists yet 
under the national system. First and last it was fairly 
well managed and successful. 

During the period of so much reckless " banking/' the 
memory of which still clouds the old State system, there 
were even outside of the Eastern States some sound and 
prudently conducted banks. Several States established 
banks of their own that carried on a regular business and 
issued circulating notes, which the Supreme Court decided 
not to be State " bills of credit/' within the meaning of the 
constitutional prohibition. Some were bad and some were 
good, as in the case of other banks, all depending upon the 
ability and integrity with which they were managed. This 
is as essential for financial success in public as in private 
business. Kentucky, Alabama, and Mississippi had State 
banks in the strict sense, which were ruined by politics, 
dishonesty, and lack of sound methods. The case of Missis- 
sippi was notorious on account of the capital being raised 
by an issue of bonds which were afterward repudiated, 
staining the credit of the State for many years. The 
" paper-money" lunacy, and lack of faith in the necessity 
of redemption were at the bottom of most of these failures. 
But there were examples of successful public banks in 
South Carolina and Indiana. The former was established 
on various assets belonging to the State and was the de- 
pository of its funds and its fiscal agent. Its debts could 
not exceed twice its capital, and that was the only restric- 
tion on the issue of notes, but deposits were not included in 
liabilities. The bank had three branches and could make 
limited loans on mortgage security. It was, on the whole, 
safely managed and survived the civil war. Its assets 
were the only security for its liabilities, including circula- 
ting notes. 



THE OLD STATE BANKS 317 

The Indiana experiment was equally successful and 
had some points of peculiar interest. The State owned half 
the capital and advanced the funds for five-eighths of the 
stock taken by private subscribers, issuing " bank notes " 
bearing 5 per cent interest to raise the money. These were 
negotiated in London and the proceeds advanced to share- 
holders on their notes, which were subsequently paid. The 
capital was $1,600,000, divided among the branches, after- 
ward increased to thirteen, and the central institution only 
exercised supervision and control, the branches doing all 
the business and being managed by the private sharehold- 
ers. The president and four directors were elected by the 
Legislature, and the stockholders of each branch chose one 
director. The capital was actually paid in silver, Spanish 
and Mexican coin, and each branch could issue notes equal 
to twice its capital, less its other debts. While the assets 
of the branches were independent they were jointly liable 
for obligations. The bank did a legitimate business and 
was successful and profitable, because it was ably and hon- 
estly managed. Indiana did not wholly escape the free 
banking craze; but after the Constitution of 1851 had au- 
thorized a general banking law and forbidden the State to 
own shares, the " Bank of the State of Indiana " was re- 
organized as a private incorporated institution and contin- 
ued to be soundly managed under the presidency of Hugh 
McCulloch, who had previously had charge of the Fort 
Wayne branch. 

The State Bank of Ohio was established on much the 
same plan, with branches and a central directing institu- 
tion, but the State never had any ownership in it. It was 
fairly well conducted and successful. A prosperous bank- 
ing business was conducted in Wisconsin under the charter 
of an insurance company by dint of capable management. 
It had no legal right to issue notes, but it made " certifi- 
cates of deposit " serve the same purpose, and they circu- 



318 THE MODERN BANK 

lated safely as money because it scrupulously redeemed 
them in coin on demand. But one of the best State bank- 
ing systems of the antebellum days was that of Louisiana, 
which was established in 1842. Under the law then passed, 
all banks were required to hold a reserve of specie equal to 
one-third of their liabilities, including notes and deposits. 
The other two-thirds had to be covered by commercial paper 
having not more than ninety days to run. There was no 
other limit put upon circulation. No bank could pay out 
any notes but its own, and balances between banks had to 
be settled in specie every Saturday. There had to be at 
least fifty stockholders, none of whom should have less than 
thirty shares, and there were examinations by a board of 
State officers at intervals of not more than three months. 
It was a perfectly sound system and the banks were ably 
and honestly conducted. As a result they were prosperous, 
did not suspend in the panic of 1857, and continued in 
operation until the capture of New Orleans during the 
civil war. 

Experience in banking under State laws was working 
toward a system when it was interrupted by that momen- 
tous event which wrought so many radical changes. It had, 
in fact, developed several systems, out of which one of en- 
during soundness might have been evolved. The issue of 
notes to be used as currency was, until near the end of the 
period, regarded as the chief function of banks, these to be 
used in making loans and effecting exchanges. In New 
England and some States West and South circulation was 
secured, like other liabilities, only by assets, sometimes 
being made a first lien and sometimes not. In a few cases 
a specified percentage of specie reserve was required. In 
Massachusetts a sound system of redemption was estab- 
lished by the cooperation of Boston banks and without the 
sanction of law. Boston became in effect a reserve city for 
New England and the Suffolk bank a clearing-house for 



THE OLD STATE BANKS 319 

notes. It was an exemplification of the " banking princi- 
ple." New York adopted in a crude way the " currency 
principle " in requiring the deposit of securities and allow- 
ing no issue of notes above their officially estimated value. 
It also applied in a crude way the safety-fund principle 
as an additional safeguard for the redemption of the notes, 
or rather for the payment of all liabilities, of failed banks. 
The proceeds of the securities were assumed to afford the 
means of redeeming the notes. 

The variety of laws and the loose and often un- 
scrupulous practise under them in different States led to 
the issue broadcast of a vast variety of notes, which cir- 
culated promiscuously all over the country on account of 
the lack of proper provision for their return and redemp- 
tion. Banks might discriminate in accepting them, but 
the people generally did not. As a result many coun- 
terfeit and spurious notes and those of insolvent banks 
floated about and vitiated the currency. " Counterfeit 
detectors " and " bank-note reporters," keeping track of 
the mixture of " paper money," were periodically pub- 
lished and became the vade mecum not only of banks but of 
mercantile houses. It is this confusion of good and bad, 
of weak and strong, this lack of a real system for the coun- 
try, that has left such an unsavory memory of the old State 
banks, but there was nevertheless a plentiful sprinkling of 
sound institutions and the germs of good banking. Exactly 
the extent of the business at its culmination, say in 1861, 
is largely a matter of estimate, though in some States accu- 
rate records were kept. The number of banks has been set 
down as 1,600, the amount of capital stock about $430,- 
000,000, loans and discounts approximately $700,000,000, 
and deposits $260,000,000. The aggregate circulation was 
in the neighborhood of $200,000,000, and this was some- 
thing less than half the volume of currency in the country, 
the rest consisting of coin. 



XL 

THE CANADA BANKING SYSTEM 

The development of banking in the States in the direc- 
tion of what might have become a settled system was ar- 
rested by the civil war, but it was afterward taken up in 
Canada and carried to its logical conclusion. The early 
banks of the old provinces were conducted rather on the 
Scotch model, and were mainly devoted to the issue of notes 
to be advanced in loans and secured only by general re- 
sources. Their circulation always exceeded deposits. They 
were subject to little regulation and some of them were pri- 
vate partnerships. Charters were afterward granted with 
limitation of liability, and after 1837 only chartered banks 
could issue notes. After the union of Upper and Lower 
Canada in 1841 an attempt was made to impose the English 
" currency principle " of setting an authorized limit to cir- 
culation, to be protected to the full by Government securi- 
ties, beyond which all issues were to be covered by coin or 
bullion, but it was not acceptable and the attempt was given 
up. In 1851 an experiment was made with a new banking 
system similar to that in New York, notes being secured by 
a deposit of public securities, but little progress was made 
with it and that was also abandoned. Shortly after the 
confederation of the provinces and the establishment of the 
Dominion Government the matter of a banking system was 
taken up in earnest, and an act was passed in 1870 which 
laid the foundation upon which the present system was 
built up and perfected. 
320 



THE CANADA BANKING SYSTEM 321 

Canada lias always depended mainly upon bank-notes 
for its currency. While it is a gold-standard country it 
has no gold coinage of its own. United States gold coin is 
a legal tender at par, and so is British gold, with the pound 
sterling as a unit at $4,866. There is no silver coinage 
except for subsidiary purposes and its legal-tender limit is 
$10. There are no silver dollars, no coin certificates, and 
gold is little used except as a fund to maintain the redemp- 
tion of notes. Dominion legal-tender notes redeemable in 
gold on demand are authorized to the amount of $20,000,- 
000, which must be secured to the extent of 15 per cent by 
gold coin, and at least 25 per cent by gold coin and Domin- 
ion securities guaranteed by the Imperial Government, and 
the other 75 per cent by ordinary Dominion securities, all 
held in custody of the Minister of Finance. Beyond this 
limit notes may be issued on deposit of gold to the full 
amount, and the outstanding volume is nowadays about 
$27,000,000, the larger part being held in the reserves of 
banks. 

The Canada banks have always had the privilege of 
maintaining branches, and there are now 34 banks with 
an aggregate of over 700 branches. No bank can be organ- 
ized with a smaller capital than $500,000, of which $250,- 
000 must be paid-up at the start. The Bank of Montreal 
has a capital of $13,379,240 and 48 branches. The Act of 
1870 limited the note circulation to the amount of the 
paid-up and unimpaired capital, required each bank to re- 
ceive its own notes at par at all its branches, and to redeem 
them in coin or Dominion notes at its main office. The old 
tax of 1 per cent on circulation was abolished, and the prin- 
ciple of double liability of stockholders for all obligations, 
including circulation and deposits, was adopted. Charters 
were to run for ten years, and in 1880 the law was amended 
so as to make circulating notes a first lien upon assets in 
case of failure. 



322 THE MODERN BANK 

In 1890 an additional security for the redemption of 
the notes of insolvent banks was provided. Each bank was 
required to keep on deposit with the Finance Minister an 
amount of cash equal to 5 per cent of its average circula- 
tion for the previous fiscal year. In case of suspension the 
notes of a bank draw 6 per cent interest until redeemed, 
and unless paid from the assets within two months the Fi- 
nance Minister appoints a day for redeeming them from 
the redemption fund. Whatever is paid in excess of the 
bank's own contribution is to be recovered from the assets, 
and any deficiency in the 5-per-cent fund must be made up 
pro rata by the other banks, but the call can not exceed 1 
per cent of circulation in any one year. Each bank is re- 
quired to maintain agencies for the redemption of its notes 
at several designated cities in different parts of the Do- 
minion. There is no prescribed percentage of reserve, but 
of whatever is kept 40 per cent must be in Dominion notes. 
The banks are required to make monthly returns of their 
condition. 

The Canada system, then, is substantially one of banks 
with large capital and the privilege of establishing branches 
wherever it is convenient or profitable. This enables them 
to distribute their capital widely in the banking business 
and brings them into competition with each other through- 
out the country, with the result of practically uniform in- 
terest charges and the fullest accommodation at the lowest 
competitive rates. Their circulation is limited only by the 
amount of their paid-up capital and secured only by their 
assets and the double liability of stockholders. The amount 
of cash reserve is left to the judgment and discretion of 
responsible managers, and the redemption fund is an in- 
surance for the redemption of the notes of failed banks, 
which keeps them from depreciating until paid. The sys- 
tem has worked successfully and been largely instrumental 
in the industrial and commercial development of the Do- 



THE CANADA BANKING SYSTEM 323 

minion. Its greatest advantage is in furnishing an elastic 
currency that is entirely safe. The banks pay out only 
their own notes and send others home for redemption, re- 
deeming their own on demand at the agencies. This keeps 
up a constant process of redemption and issue and the vol- 
ume fluctuates with the requirements of business. It rarely 
exceeds 50 to 60 per cent of the bank capital, but it varies 
in different parts of the year by about 20 per cent, according 
to the demands of the season in marketing the annual prod- 
ucts of the country. The general business of the banks 
in discounting commercial paper, making loans, buying and 
selling exchange, and transferring funds and credits is sim- 
ilar in all respects to that of the national banks of the 
United States. They can not pay dividends of more than 
8 per cent until they have accumulated a surplus of 30 per 
cent of their paid-up capital. 

The freedom with which notes are issued and retired 
obviates the necessity of transferring funds from one part 
of the Dominion to another according to local demands, 
such as are produced by the autumnal crop movements. 
The banks have suffered from no panic or crisis in thirty 
years and more. 

The tendency in recent years has been toward a dimi- 
nution in the number of banks and an increase in capital 
and in branches. During 1903 the Commercial Bank of 
Windsor was absorbed by the Union Bank of Halifax, and 
the Halifax Banking Company by the Canadian Bank of 
Commerce at Toronto. According to the latest record 
(August, 1903), there are now thirty-four central banks. 
These are distributed as follows : One on Prince Edward's 
Island, capital $324,856, reserve fund $222,737, deposits 
$996,627; three in New Brunswick, capital $880,000, re- 
serve fund $960,000, deposits $3,986,052; six in Nova 
Scotia, of which four are in Halifax and two at Yarmouth 
—capital $7,596,714, of which $2,000,000 is of the Bank 
22 



324 THE MODERN BANK 

of Halifax and $2,828,130 of the Koyal Bank of Canada 
in the same city — reserve fund $7,224,504, deposits $43,- 
178,647, of which nearly $20,000,000 were in the Bank of 
Halifax and over $14,500,000 in the Royal Bank of Can- 
ada ; twelve in Quebec, of which six are in Montreal and 
three in the city of Quebec, the only other large one being 
at Sherbrooke, capital $39,500,878, reserve fund $20,801,- 
442, of which $13,609,000 of capital and $9,000,000 of 
reserve fund belonged to the Bank of Montreal, deposits 
$189,548,843, of which $87,507,048 were in the Bank of 
Montreal; Ontario twelve, of which nine are in Toronto, 
capital $28,791,018, reserve fund $18,913,528, $8,700,- 
000 of the former and $3,000,000 of the latter belonging 
to the Canada Bank of Commerce, deposits $189,548,843, 
of which $87,507,048 were in the Canada Bank of Com- 
merce. The total capital of the thirty-four banks was $77,- 
093,466, total reserve fund, or surplus, $47,722,212, de- 
posits $422,688,150. The few banks having capital of less 
than $500,000 were chartered before that limit was set by 
the banking law. 

About $35,000,000 of the deposits were at agencies out- 
side of Canada and only about $110,000,000 of those in 
Canada were subject to demand-checks, the rest requiring 
notice of draft. A small amount, about $6,500,000, were 
due to banks outside of the Dominion. There was due 
from foreign banks about $20,000,000, including those of 
the United Kingdom. Of the resources, about $360,000,- 
000 were in " current loans," and $40,000,000 in call loans 
in Canada and $58,000,000 in loans outside of Canada and 
something over $60,000,000 was held in securities owned. 
The clearings at the eleven Canada clearing-houses for the 
week ending August 22, 1903, aggregated $49,164,102, of 
which $20,474,348 were at Montreal and $14,315,692 at 
Toronto. 



XLI 

THE UNITED STATES NATIONAL SYSTEM 

When the United States became involved in a war for 
the preservation of the Union in 1861 the Government had 
no relation with the banking system of the country, and 
the policy for many years had been to avoid all such rela- 
tion. The Treasury received and disbursed all the revenues 
in coin and kept all its own deposits with sub-treasuries at 
leading cities in different parts of the country. There was 
consequently no effective financial agency to meet the new 
requirements, but the Government was soon compelled to 
resort to the strong banks of the Eastern cities for help. 
It began at once to meet the war expenses by means of loans 
instead of increasing revenues. The banks offered to ad- 
vance $150,000,000 in gold on three-year notes bearing 7.30 
per cent interest, to be reimbursed from the proceeds of 
bonds, and they also took the bulk of the bonds when issued 
and undertook to market them. Notes payable on demand 
at sub-treasuries and bearing no interest were issued for cir- 
culation, but were not made a legal tender for debts. The 
banks objected to this, because it not only threatened their 
own circulation but was a menace to continued specie re- 
demption, which had, in fact, to be suspended at the end of 

1861 by both the Government and the banks. Early in 

1862 legal-tender notes were issued without interest and 
with no provision for redemption, and the result was a gen- 
eral disappearance of coin and depreciation of the whole 
paper currency. 

325 



326 THE MODERN BANK 

Already there had been proposals for national banks, 
based mainly on the free banking system of New York, 
with a deposit of Government bonds for the security of cir- 
culation. Congress was reluctant to resort to this expe- 
dient, but came to it early in 1863 through a mixture of 
motives. One motive was to make a market for bonds and 
to secure their general distribution in this country in order 
to sustain the public credit at home, and another was to 
supply a safe and uniform currency, of which the need had 
greatly increased, and to diminish the necessity of issuing a 
large volume of irredeemable Government notes. It was 
also felt that it would facilitate an early return to specie 
payments. The first Bank Act, of February, 1863, was de- 
fective, and progress under it was unsatisfactory. It was 
superseded by the Act of June, 1864, which remedied some 
of the defects and made liberal provision for the conversion 
of the State banks to the national system. 

This law provided for the organization of " associations 
for carrying on the business of banking " by any number 
of " natural persons " not less than five, to have succession 
for a term of twenty years. This has been continued by 
renewal of charters for a like period. It required a capital 
of at least $100,000, except that banks might be organized 
with not less than $50,000, with the approval of the Secre- 
tary of the Treasury, in places of not more than 6,000 in- 
habitants, and in places of 50,000 or more the capital could 
not be less than $200,000. Half had to be paid in before 
business could begin, and the rest in instalments of not less 
than 10 per cent monthly. 'No provision was made for 
more than one place of business, which precluded the estab- 
lishment of branches. A deposit of Government bonds with 
the United States Treasurer was required of not less than 
one-third of the capital stock and in no case less than $30,- 
000. Shareholders were made ratably liable for debts to 
the par value of their stock in addition to the amount of 
capital invested in their shares. 






THE UNITED STATES NATIONAL SYSTEM 327 

A bureau was established in the Treasury Department, 
under the charge of a Comptroller of the Currency, to 
attend to the execution of all laws relating to bank 
currency, and each bank was authorized to issue notes 
to the amount of 90 per cent of the market value of 
the bonds deposited, but not exceeding 90 per cent of 
the par value, subject to a tax of 1 per cent upon the 
aggregate circulation. Sixteen leading cities were desig- 
nated as reserve cities, and in those the banks were re- 
quired to keep in " lawful money " 25 per cent of their 
circulation and deposits. Elsewhere they must keep 15 
per cent, but three-fifths of it might be deposited in reserve 
city banks. New York was made a central reserve city, 
and one-half the cash reserve of banks in the reserve cities 
might be kept on deposit there, thus centralizing the bulk 
of the reserves but weakening their volume, as the deposits 
in New York, against which it held 25 per cent, might 
include half the reserve of the reserve cities, which might 
include three-fifths of those of the " country banks." This 
made the actual reserve less in amount than the nominal 
aggregate for all the banks, and was calculated to put a 
heavy strain upon New York in time of stringency. In 
1887 it was provided that any city of 200,000 inhabitants 
might be made a central reserve city, and Chicago and St. 
Louis were added to New York, but the latter continued 
to bear the brunt of the reserve requirements, as its banks 
still held large deposits of the reserve money of outside 
institutions. 

All notes were to be prepared and printed in uniform 
style for each denomination, and issued from Washington 
with the Treasurer's signature and that of the Eegister of 
the Treasury, certifying to the deposit of the security, and 
blank places for those of the proper officers of each bank, 
to be affixed before the actual issue for circulation. They 
were not to be a legal tender for private debts, but the banks 



328 THE MODERN BANK 

were required to receive those of each other, and they were 
receivable and payable by the Government except where 
coin was specifically prescribed by law, as in the case of 
customs receipts and payments on account of the public 
debt. The first act provided only that each bank should 
redeem its notes over its own counter, but the second re- 
quired the establishment of redemption agencies in certain 
leading cities. In 1874 an entirely new system of redemp- 
tion was provided, which put the whole responsibility upon 
the Government. 

Each bank was then required to keep 5 per cent of the 
amount of its circulation in " lawful money " on deposit 
with the Treasurer of the United States. This was to con- 
stitute a fund for the redemption of its notes whenever they 
were sent to the Comptroller for the purpose, no matter by 
whom. The practical effect was little more than to keep 
the circulation clear of worn and mutilated currency, and 
the process was conducted mainly through the banks them- 
selves. Provision was made for replacing redeemed notes 
on replenishment of the fund. This was in no sense a 
" safety fund." Each deposit belonged to the bank making 
it and was for the redemption of its own notes alone. It 
could be counted as part of its reserve, and after the amend- 
ment of 1874 the reserve was to be a percentage of deposits 
only, not including circulation. If a bank desired to with- 
draw a part of its circulation it had to make a special de- 
posit of " lawful money " to the amount, and then the Gov- 
ernment would take up the necessary proportion of notes 
and release the corresponding amount of bonds. An amend- 
ment in 1882 limited the aggregate amount of withdrawals 
to $3,000,000 a month, and provided that any bank retiring 
notes could not increase its issue again within six months. 
As to the redemption of the notes of insolvent banks, the 
Comptroller attended to that entirely. He was required 
to redeem all the notes at once on demand, and the proceeds 



THE UNITED STATES NATIONAL SYSTEM 329 

of the bonds held as security would indemnify the Treasury. 
Besides, the Government had a first lien on assets and on 
the liability of shareholders. 

At first a limit of $300,000,000 was put upon the vol- 
ume of bank-notes to be issued, and one-half the amount 
was to be apportioned among the States according to repre- 
sentative population, but as preference was given to exist- 
ing banks converted to the national system, the result was 
the concentration of the bulk of the circulation in the East- 
ern cities. Attempts were made to remedy the inequality, 
first by authorizing an additional $54,000,000 and assign- 
ing it to other parts of the country, and afterward by 
withdrawing $55,000,000 from Eastern banks and trans- 
ferring it to those of other parts of the country, but this had 
only mitigated the difficulty slightly when the Specie Re- 
sumption Act of 1875 removed the limit upon circulation 
altogether. When the act of 1864 was passed, notes of 
State banks were still in circulation to the amount of nearly 
$180,000,000, and little more than $31,000,000 had been 
issued by national banks under the act of the previous year. 
On July 1, 1865, some months after the war was over, the 
State banks still had about $143,000,000 of their notes out, 
while the circulation of the national banks was a little over 
$146,000,000. Then Congress decided to give the latter a 
monopoly by imposing a tax of 10 per cent upon the circu- 
lating notes of all other banking institutions, and when this 
took effect, July 1, 1866, the issues of the national banks 
had risen to over $276,000,000, and those of State banks 
had fallen below $20,000,000. There were then 1,634 of 
the former in existence, many of which had been converted 
from State institutions. ISTo bank could have a circulation 
exceeding the amount of its paid-up capital or more than 
90 per cent of the bonds deposited as security, and after 
1874 no bank withdrawing circulation could reduce the 
amount of bonds held by the Treasury below $50,000. 



330 THE MODERN BANK 

In 1882 the amount necessary to be held was reduced to 
one-fourth of the capital in the case of banks whose capital 
stock was $150,000 or less. 

Under this system the amount of circulation fluctuated 
with the value of the bonds that had to be invested in as 
security and the rate of interest which the banks could de- 
rive from their possession, rather than with the demands 
of business for currency. When the resumption act was 
passed it was the purpose to withdraw the Government 
legal-tender notes to the extent of 80 per cent of hank-notes 
issued to take their place, until their volume was reduced 
to $300,000,000, but after the act took effect, in 1879, and 
the process of redemption was begun, a temporary strin- 
gency caused an outcry against their retirement and the 
process was arrested, leaving the volume at $346,681,016, 
where it has remained ever since. The maximum issued 
had been $442,424,007, in March, 1806. The banks aided 
materially in bringing about resumption, as they held a 
large part of the legal-tender notes and refrained from offer- 
ing them to draw gold from the Treasury, but their own 
circulation did not expand. In fact, as the Government 
bonds appreciated in market value and were refunded at 
lower rates of interest it was severely contracted. The 
maximum was something over $302,000,000 in 1883, and 
it fell to little more than $173,000,000 in 1892. The fluc- 
tuation was affected by the demand for currency, but it was 
kept within inelastic limits by the bond-security require- 
ments. 

Considerable relief was afforded by the Gold Standard 
Act of L900, which provided for refunding certain 
bonds in long-term i>snes at :? per cent, permitted the 
banks to issue notes to the full par value o( the bonds de- 
posited, ami reduced the interest on circulation from 1 to i 
of 1 per cent when the new 2-per-cents were used for se- 
curity. It also permitted banks to be organized with a cap- 



THE UNITED STATES NATIONAL SYSTEM 331 

ital as low as $25,000 in places of not more than 3,000 
inhabitants. 

These provisions led to the establishing of many new 
banks and the conversion of more of the existing State 
banks. The total number of national banks had increased 
in the summer of 1903 to over 5,000, with a paid-up capital 
exceeding $754,000,000 and a total circulation of over 
$413,000,000. Banks incorporated under State laws have 
continued to prosper, although they could not maintain cir- 
culating notes under the tax imposed by national authority, 
and they added materially to general banking facilities, es- 
pecially in the more sparsely settled parts of the country, 
where capital was not plentiful. Many of these were 
organized with less capital than was required under the 
national system even after the passage of the Act of 1900. 
Laws regulating banks of deposit and discount differed in 
different States, but were generally closely assimilated to 
the National Banking Act, except that they made no pro- 
vision for circulation. In New York, where the power to 
issue notes nominally continues, they are required to keep 
a reserve of 15 per cent of deposits, and in New York city 
those belonging to the Clearing-IIouse Association must, 
under its regulations, keep 25 per cent. 

Special safeguards are laid down in the national law 
for banking operations as well as for circulation. To en- 
force the requirement regarding the reserve against de- 
posits, it is provided that when that of any bank falls below 
the prescribed percentage it shall not increase its liabilities 
by making new loans or discounts, or otherwise than by the 
purchase of sight-bills of exchange, and shall make no divi- 
dend until the reserve has been fully restored. The Comp- 
troller may notify any bank whose reserve is insufficient 
that it must be made good, and if it is not done within 
thirty days he may, with the concurrence of the Secretary 
of the Treasury, appoint a receiver to wind up its business. 



332 THE MODERN BANK 

Banks are prohibited from loaning more than 10 per cent 
of the amount of their capital to one person and from certi- 
fying checks for any amount in excess of the balance the 
drawer has on actual deposit. They are subject to examina- 
tion under authority of the Comptroller, and must make 
returns to him in a prescribed form, and he reports upon 
their condition as to capital, resources, loans, deposits, cir- 
culation, etc., not less than five times a year. The old policy 
of not making Government deposits in banks was abandoned 
when the national system was first established, and au- 
thority was given for depositing any revenues except cus- 
toms receipts in banks to be designated as public depos- 
itories by the Secretary of the Treasury, who must require 
security for safe-keeping and repayment by the deposit of 
Government bonds " and otherwise " to his own satisfac- 
tion. Authority was also given for using the banks as fiscal 
agents of the Government, and in this capacity they have 
been especially useful in placing loans and in refunding 
operations. 

The system has proved an exceptionally safe and stable 
one for the general purposes of banking, though there is a 
point of weakness in the multitude of small banks scattered 
over the country in place of strong institutions in commer- 
cial centers and cities of importance, with branches in 
smaller places. The latter would be able to employ their 
resources more widely and furnish capital more readily 
wherever it was needed, and the result would be greater 
uniformity in the rates for loans as well as greater security 
for all concerned. Their currency is uniform and safe, and 
it circulates all over the country and is accepted everywhere 
regardless of its particular source, because the Government 
is responsible for its redemption, but it lacks the essential 
quality of elasticity, on account of the bond security re- 
quired. If they rested upon the credit of the banks them- 
selves and were secured by a first lien upon assets and the 



THE UNITED STATES NATIONAL SYSTEM 333 

liability of shareholders, with the addition of a specified 
cash reserve, if deemed requisite, and with a safety fund 
for the redemption of those of insolvent institutions ; and 
if each bank was made responsible for the redemption of its 
own notes, there would still be uniformity and safety with 
the desirable quality of elasticity. The volume would adapt 
itself constantly to the requirements of business under the 
influence of interest rates, varying with supply and demand, 
and there would not be the same necessity as now for con- 
tinually transferring funds from one part of the country 
to another in response to local demands. The lack of the 
capacity to expand and contract readily, to fluctuate with 
the transactions of commerce, results in the constant flow 
of money to the reserve cities when it is not needed else- 
where, and the draft from them when the need returns, 
with little reference to the actual demand at the centers, 
and there is no easy means of getting rid of a redundancy 
or supplying a deficiency. The currents of this ebb and 
flow center upon New York, stimulating speculation at one 
time and inducing stringency at another. When the de- 
mand comes for the annual crop movement the drain is 
severe and has a serious effect upon the money market if 
there is a normal demand for funds at the financial center 
for business uses. The lack of the power of the banks to 
respond with a legitimate use of their credit in the issue of 
notes is aggravated by the Treasury operations in drawing 
currency from the regular channels by collections and re- 
turning it by payments in a spasmodic fashion. 



XLII 

TENDENCIES OF AMERICAN BANKING 

While the theory and the general principles of banking 
are the same everywhere, and varying methods are only 
different ways of attaining results that are essentially the 
same, the system of any particular country is the outgrowth 
of its own history and circumstances, and becomes in- 
trenched in traditions that it is not easy to change. A 
sudden transformation of a system, however desirable the 
result might be when once established, is practically im- 
possible, unless it is caused by a sudden and exceptional 
stress of circumstances. 

The European systems, for the most part, had their 
origin in the needs of governments for a financial agency 
to assist them in raising loans and handling revenues, and 
to supplement monetary resources with their credit. Their 
private privileges were a compensation for public services. 
The usual result was one great central institution in close 
relation with the Government, with the right to establish 
branches and local agencies, and all other banking concerns 
were made in a sense subordinate and subsidiary to this. 
The tendency has been to limit the right to issue circulating 
notes to the large central banks, and to make of these a part 
— sometimes the main part — of the national currency. This 
confuses them with money, whereas they belong in the cate- 
gory of credit. 

When this country formed a government of its own, it 
began, under the influence of English traditions, by estab- 
334 



TENDENCIES OF AMERICAN BANKING 335 

lishing a great National Bank, without interfering with the 
right of States to have banking systems of their own. The 
result, as we have seen, was, after two notable experiments, 
the survival of the State systems alone, under which there 
were in a few cases central banks associated with State 
governments and maintaining branches, but for the most 
part a large number of independent local institutions 
brought gradually under the regulation of law, which 
tended toward uniformity, and having no association with 
each other except what they voluntarily formed to serve 
their own purposes. 

When the events of the civil war led to the establish- 
ment of a new national system, there was no reversion to 
the idea of a great central institution with branches and 
agencies, but the adoption of the State plan of independent 
banks of moderate capital scattered all over the country. 
Constitutional obstacles, as well as a strong sentiment for 
the integrity of the rights of States within their own juris- 
diction prevented any superseding of the separate State 
systems, except in the matter of issuing circulating notes 
to form a part of the common currency of the country. For 
the sake of uniformity, safety, and a concentrated super- 
vision and control the notes of State banks were taxed out 
of existence. 

Circumstances rather than reason or sound policy dic- 
tated the system of bank currency that was then adopted, 
and that has become intrenched in the traditions and preju- 
dices of a generation that has seen a remarkable financial 
development. Now there is a strong tendency to pull away 
from it, which is powerfully resisted. Notwithstanding the 
great number and the individual independence of our na- 
tional banks, the principle upon which their circulation is 
based is substantially that of the Bank of England. It is 
not a bank currency in the true sense of the term, but a 
Government currency; not a means of employing bank 



336 THE MODERN BANK 

credit to meet the requirements of business, but a means of 
applying Government authority to supply " money " to the 
country, for which the mint and the treasury, and not the 
banks, are the proper agency. 

A certain portion of the circulation of the Bank of 
England rests upon Government and " other " securities, 
and that is an unchanging portion except as it is added 
to by the surrender of circulation by the other banks. The 
rest is based upon a full equivalent in coin. It can only 
be increased by a deposit of coin or bullion to the full 
amount, as it is diminished only by redemption in coin, 
which is merely the payment of the demand notes. In the 
United States the notes must be secured by deposit with the 
public Treasury, not of coin in any part, but of Govern- 
ment bonds to the full amount at their par value. The 
volume can only be increased by buying and depositing 
more bonds, and can be reduced -only by the deposit of 
money to redeem the notes and the withdrawal of bonds. 
With the necessity of investing so much capital in bonds at 
a premium, getting 2 per cent from these, and paying an 
annual tax of -J of 1 per cent on circulation, there is hardly 
greater facility in adapting the currency to the needs of 
the country than there would be in having bullion coined 
at the mint, if the proceeds were used directly as the basis 
of circulation. 

There is little advantage in this kind of Government 
currency over that which consists of coin and coin certifi- 
cates issued directly by the Government through the mint 
and public Treasury. If the four hundred millions of bank 
notes were replaced with these, and the Government bonds 
deposited for their security were converted into active cap- 
ital, the banks would be as well off and the currency would 
be substantially as flexible and adjustable as it is at present. 
It could be increased by having gold coined and depositing 
the coin for certificates, as additional notes of the Bank of 



TENDENCIES OF AMERICAN BANKING 337 

England are obtained, and it could be reduced by redemp- 
tion as now. 

A true bank currency consists of the notes of banks, 
resting upon their credit and secured by their resources, 
each bank being required to pay its own notes in standard 
coin on demand and to send those of other banks home to be 
paid like their checks, instead of using them as cash. This 
was the form with the safest and soundest of the old State 
banks. It is the form adopted and adapted from them by 
the banks of Canada. The tendency of sentiment in this 
country is likely to be more and more in favor of making 
Government currency the issue of the Government alone 
and based wholly upon coin, and gradually to permit the 
banks to have a currency confined to the circle of their 
operations and based upon their credit, with all necessary 
safeguards for holding them to their obligation to redeem 
these like other demand liabilities, and special insurance 
for their prompt payment in case of insolvency. Either 
this or no bank circulation is the logical alternative. Bank 
of England notes are virtually gold certificates. Bank of 
France notes and the notes of Canada banks are a credit 
currency, making the " money supply " constantly vary 
with the requirements of business for a medium to effect 
exchanges, in which credit plays such a prominent and 
varied part. 

Another weakness of the American system which there 
is an irresistible tendency to correct arises from the multi- 
plicity of small banks, due to the lack of authority for any 
national bank to maintain branches. There is economy and 
strength, especially in banking, in large capital and con- 
centrated skill and responsibility in management. It tends 
to a distribution of resources from centers where they ac- 
cumulate and their application over a wider field at com- 
petitive rates, making the cost of banking credit cheaper 
and more uniform and the credit itself safer. In the 



338 THE MODERN BANK 

absence of the privilege of establishing branches and local 
agencies the present tendency is for banks in the large cities 
to diminish in number and increase in capital and resources, 
and to acquire control over other banks through which they 
must of necessity do much of their business. Banks can 
not, as national corporations, own the stock of other banks, 
but there is nothing to prevent the same set of capitalists 
from controlling a large bank in New York or any other 
important financial center, or more than one, and at the 
same time controlling small banks wherever they may find 
it convenient or advantageous. There is a strong tendency 
to consolidation, combination, and extended control in 
banking, as in other business requiring the use of large 
capital, and it is likely to go on with only a part of the 
advantages of " branch-banking " and some disadvantages 
which that does not involve. But with the requirement of 
fully paid-up capital, a constant surplus, Government su- 
pervision, full reports of condition, and frequent examina- 
tions, there is little danger of abuses of power and none 
of monopoly. In nothing is competition so free and so 
incapable of injurious restraint as in money and credit. 
Whoever has it can use it and can let others use it for a 
consideration. 

The tendency of banks to use their resources for the 
promotion of speculative enterprises, and to share in their 
risks, is one of the dangers of a system where there are so 
many of them competing with each other under independent 
management. It is the business of banks to make loans and 
advances upon assured credit and sound security ; to serve 
the legitimate ends of industry and trade and the financial 
operations by which they are promoted and sustained, and 
not to have any part of their resources involved in risky 
ventures or be prostituted to the schemes of capitalists who 
gain control over their management. It is an era of com- 
bination and association, and there is a disposition among 



TENDENCIES OF AMERICAN BANKING 339 

powerful capitalists to unite in directing great interests and 
making them work together ; but banking should stand apart 
as the common agency of all, to be used conservatively and 
impartially for the benefit of industry, trade, commerce, 
and finance, of which it is the necessary, and should be the 
faithful and trustworthy, servant. 



23 



INDEX 



Acceptances or accepted drafts, 104. 

Accepted, or certified, check, 90. ■ 

Accepted items for Clearing- House, 63. 

Account current with correspondent 
banks, 178. 

Accounts, how kept in deposit ledgers, 
174; active and inactive, 174; form 
of individual, 176; in general ledger, 
180; in savings-banks, 247. 

Adding machine, description and use, 
53; for listing checks, 95, 98; modi- 
fication in savings-bank, 249. 

Additions to Clearing-House list, 62, 
64. 

African Banking Corporation, 277, 302. 

Agencies of foreign banks in the United 
States, 227. 

Alabama, early banking in, 316. 

Alphabetical index of depositors, 47; 
of correspondent banks, 78; of cities 
and towns, 79; list of depositors' 
paid checks, 98; index of credit in- 
formation, 131; filing of loan en- 
velopes, 144; indexes for dividend 
collections, 153; arrangement of 
ledger accounts, 170, 177. 

American banking, tendencies of, 334. 

American exchange in London, 232. 

Amsterdam, Bank of, 263. 

Anti-bank movement in New York, 314. 

Antwerp, first banks in, 262, 264. 

Arithmometer, same as adding machine, 
53, 95, 98, 249. 

Articles of association of United States 
national banks, 26. 

Assets, as they appear in general ledger, 
181; in reports to Comptroller, 190; 
distribution in case of failure, 202. 

Associations of banks and bankers, 204. 

Australasia, Bank of, 302. 

Austria-Hungary, banking in, 274, 297. 

Austro-Hungarian Bank, 294, 297. 

Automatic cashier for making change, 
87. 

Balance card, use of, 48. 

Balance ledger, how arranged, 94; en- 



tries in, 95; purpose of, 170; how kept, 
171. 

Balance ticket at Clearing-House, 69. 

Balances, settlement of, by banks, 16; 
of depositors, 48; settlement at 
Clearing-House, 70, 72; settlement of, 
in domestic exchange, 112; how kept 
in deposit or individual ledgers, 175; 
settlement of, in foreign exchange, 
231; how kept in savings-banks, 251. 

Bank, origin of, 9; first business, 10; 
chief function, 14; organization of, 
25 et seq. 

Bank Act, of England, 267. 

Bank currency, true character of, 337. 

Bank draft, for payment of collections, 
82; use in domestic exchange, 109, 
111. 

Bank of Amsterdam, 263. 

Bank of Australasia, 302. 

Bank of Belgium, 275, 300. 

Bank of Calcutta, 302. 

Bank of Egypt, 285, 302. 

Bank of England, when founded, 265; 
character down to 1844, 265 et seqr, 
character after 1844, 279; notes of, 
280; reserve, 281; control of gold 
movement, 282; statistics, 284. 

Bankers, the first, 9. 

Bankers, private, see private banking- 
houses, 223. 

Bankers' Associations, object of, 204, 
212. 

Bankers' bills of exchange, 236. 

Bankers' Clearing-House, London, 285. 

Banking-houses, private, 223 et seq. 

Banking reserve, 163. 

Bank of France, founded, 272; organi- 
zation and methods of, 293. 

Bank of Ireland, 270. 

Bank of Italy, 275, 298. 

Bank of Montreal, 321. 324. 

Bank of Naples, 275, 298. 

Bank of Netherlands. 275, 300. 

Bank of Norway, 276, 302. 

Bank-money of Bank of Amsterdam, 
263. 

341 



342 



THE MODERN BANK 



Bank-notes, what they are, 21; use of, 
22; those of United States national 
banks, 27; signature of, 28; restriction 
upon issue, 116; redemption of, 160; 
provisions of law relating to, 328. 

Bank of Portugal, 299. 

Bank of Prussia, 273, 288. 

Bank of San Carlos, 277. 

Bank of San Fernando, 277. 

Bank of Scotland, 268. 

Bank of Sicily, 275, 298. 

Bank of Spain, 277, 298. 

Barter, the elementary principle of 
trade, 2; effected by money, 5; ef- 
fected by credit, 7. 

Belgium, banking in, 275, 300. 

Biddle, Nicholas, president United 
States Bank, 306. 

Bills discounted, meaning of, 119; 
ledger account of, 124. 

Bills of credit, notes of State banks de- 
cided not to be, 316. 

Bills of exchange, foreign, on ship- 
ments abroad, 108; banks buy or sell 
for customers, 152; character and 
purpose of, 227 et seq.; commercial 
and bankers', 236; use in making 
loans, 237; for investment and specu- 
lation, 239. 

Bills of lading, use of, 108; "through," 
108. 

Bills receivable, meaning and use of, 
119, 121. 

Bonds, United States, deposited in or- 
ganizing national bank, 27; to se- 
cure circulation, 32; when forfeited, 
201. 

Bonds and stocks bought and sold for 
bank's customers, 154. 

Book account with trader, 6. 

Bookkeeping, department of, 45; de- 
tails of work, 169 et seq.; in savings- 
bank, 251. 

Borrowing, extent of, in commercial 
business, 118. 

Boston Clearing-House plan for col- 
lecting checks. 83. 

Branch banking, no provision for, in 
national law, 204; in States, 213; in 
Canada, 321. 

British Bank of South America, 
302. 

British Linen Company, 269. 

Bulgaria, banking in, 300. 

Bullion report, 267. 

Burr, Aaron, author of Charter of Man- 
hattan Company, 313. 

Buying notes on option, 126, 134. 

By-laws of national banks, 30. 



Cable orders, in foreign exchange, 243. 

Call loans, meaning, 13; how managed, 
137 et seq. ; fortify reserves, 167. 

Canada, Clearing-House system, 211; 
banks with agencies in New York, 227; 
banking system, 320 et seq.; statis- 
tics of banks, 323. 

Capital in organizing national banks, 
26, 326. 

Cash, in receiving teller's deposits, 53; 
in charge of paying teller, 87; 
schedule of, 89; account in general 
ledger, 182. 

Cashier, as officer of bank, 27; as 
secretary of directors. 37; general 
duties, 41; must attest reports, 192, 
195. 

Cashier's checks, in payment of collec- 
tions, 82; general use of, 147. 

Cashing checks of other banks, 90. 

Central reserve cities, 165, 327. 

Certificate, of United States coin, 24; 
of organization of national banks, 
26; of Comptroller authorizing a 
bank to begin business, 28; of 
shares of stock, 28; Clearing-House 
for settling balances, 70; Clearing- 
House loan, 208. 

Certificate of deposit, for transfer of 
cash, 110; general use of, 147; among 
liabilities, 148; use by trust com- 
panies, 220. 

Certificate of protest, notary's, 82, 157. 

Certification of checks, 90. 

Charge tickets, 98, 179. 

Charter, of national banks, 28; re- 
newal of, 29; forfeiture of, 202. 

Chartered Bank of India, Australia, and 
China, 302. 

Check -book, 57. 

Check-clerks, 45, 95. 

Check-ticket at Clearing-House, 66. 

Checks, use of, 15; received in de- 
posits, 50; how drawn, 57; must be 
signed by hand, 57 ; exchange through 
Clearing-House, 65 et seq.; collection 
of out-of-town, 75; indorsed for col- 
lection, 80; payment of, by bank, 86: 
of corporations, how signed, 87; 
how disposed of after payment, 93 
et seq.; filed away and returned as 
vouchers, 96, 98. 

Cheves, Langdon, president United 
States Bank, 305. 

Circulation of national banks, re- 
quirements for taking out, 22, 27; 
restriction upon, 116; not lawful 
money, 159; redemption of, 160, 328; 
account in ledger, 160; report upon, 



INDEX 



543 



to Comptroller, 190; provisions of 
law relating to, 328. 

Circulation book of national banks, 161. 

City Bank of Glasgow, failure of, 269. 

"City office" for collections in city, 61. 

Clay, Henry, defends United States 
Bank, 306. 

Clearing agent, bank acting for non- 
member of association, 64. 

Clearing-House, origin of, 16; func- 
tions, 17; checks or exchanges for, 
54, 56; process of exchanging 
checks in New York, 63 et seq. 
certificates for settling balances, 70 
variations in different cities, 72 
due-bills, 74; statements, 188, 190 
loan certificates, 208. 

Clearing-House associations, primary 
object, 63, 204; issue of loan certifi- 
cates, 167, 208; various functions, 
207; in different States, 211. 

" Clearing-House of the world's com- 
merce," why London is so called, 
235, 285. 

Clearings, volume of, in United States, 
211; in London and other English 
cities, 285. 

Clerks, of bank, duties, 44; grades and 
promotions, 196 et seq. ; of Clearing- 
House, 67, 70. 

Collateral loans, 137 et seq.; form of 
note, 140. 

Collateral security, 13; what consists of, 
138; margin of, 141. 

Collection clerk, duties of, 101. 

Collection registers, use of, 101. 

Collections, department of, 44, 101; 
made by note-teller, 61: of out-of- 
town checks, 75 et seq. ; other items, 
102; of matured notes, 124, 125; 
charges for, 208. 

Collectors, duties of, 197. 

Combination locks, 36, 256. 

Commercial paper, meaning and use of, 
118. 

Commercial bills of exchange, 236. 

Committees of directors, 38, 120; of 
Clearing-House, 206. 

Comptoir d'Escompte, 295. 

Comptroller of the Currency, relation of 
to organizing national banks, 26; cer- 
tificate of authority, 28; to approve 
renewal of charters, 29; authority 
affecting reserves, 165; appointment 
of examiners, 187; reports to, 190; 
action in liquidation of failed banks, 
200. 

Conversion of State to national banks, 
28. 



Copy press, use of, 82, 156. 

Corporation trust companies, 218. 

Correspondence department, 44; du- 
ties of, in connection with out-of-town 
collections, 61, 77; miscellaneous 
functions, 155. 

Correspondent banks, service in col- 
lecting checks, 78; accounts as de- 
positors, 177. 

Corresponding clerk, duties of, 44, 155. 

Country banks, service in making col- 
lections, 78; as borrowers from city 
banks, 125; statements of credit, 
134. 

Coupon clerk, duties of, 62. 

Coupons, interest, received among de- 
posits, 50; how collected, 62, 103, 108. 

Credit, origin of, 5; use in economizing 
money, 7; different forms and use in 
effecting exchanges, 18; importance 
of, in granting discounts, 130. 

Credit balance at Clearing-House, 64. 

Credit books, regular, 170; how kept, 
172; supplementary, 173. 

Credit clerk, qualifications and duties, 
124, 130, 135. 

Credit department, 45; functions and 
methods, 129 et seq. 

Credit -ticket at Clearing-House, 66. 

Credit Foncier, 295. 

Credit Lyonnais, 295. 

Creditors, notice of liquidation to, 202. 

Credits, in depositors' pass-book, 51; 
at Clearing-House, 66; how entered 
in ledgers, 175. 

Crop-moving, effect of, in domestic ex- 
change, 115. 



Daily averages, 183. 
Daily statement book, 183. 
Debit balance at Clearing-House, 64. 
Debit books, regular, 172; supplemen- 
tary, 173. 
Debits, in depositors' pass-book, 51; 

at Clearing-House, 66; how entered 

in ledgers, 172, 175. 
Delivery clerk at Clearing-House, 67. 
Demand loans on collateral security, 

13, 137. 
Denmark, banking in, 276, 302. 
Departments of banks' work, 35, 43 

et seq. 
Deposit, certificate of, 147. 
Deposit ledger, or individual ledger, 173. 
Deposit slip, 48, 49. 
Depositors, made by credit, 14; index 

of, 47; how made generally, 48; 

signatures of, 48; who may be, 50; 



344 



THE MODERN BANK 



who may draw against account of, 57 ; 
preferred in making loans, 122. 

Deposits, use of, 11; how created, 12, 
14, 48; what they consist of, 51; as 
result of loans, 119; of savings-banks, 
244. 

Deutsche Bank, 291. 

Development of banking, 261 et seq. 

Directors, part in organizing national 
bank, 26; duties, 27, 38; meetings, 
37; responsibility, 39, 120, 202. 

Disconto-Gesellschaft, 291. 

Discount, meaning of, 12; in rate of 
domestic exchange, 112. 

Discount clerk, duties of, 120, 122. 

Discount register, how kept, 122. 

Discounts in making loans, 118 et seq. 

Dividends collected for customers, 153. 

Dividends and earnings, report of, 193. 

Dividends of savings-banks, 253. 

Documentary acceptances, meaning of, 
234. 

Dollar, what constitutes a, 24. 

Domestic exchange, 104 et seq. 

Dominion notes of Canada, 321. 

** Double-name paper," 120. 

Drafts, collection of, 102; use in do- 
mestic exchange, 104; acceptance 
of, 105; forms of, 106; in savings- 
banks, 249. 

Dresdner Bank, 291. 

Due-bills, use of, in settling Clearing- 
House balances, 74. 



Earnings, periodical statement, 184; 
report to Comptroller, 193. 

Employees of bank, 46. 

England, Bank of, 265; banking sys- 
tem of, 279 et seq. 

Envelopes, for coupons, 50; for Clearing- 
House exchanges, 66; for collateral 
securities, 142. 

Equipment of banking premises, 35. 

European banking systems, character- 
istic of, 334. 

Examination of banks, ordered by 
directors, 31; of condition, by com- 
mittee of employees, 186; by com- 
mittee named by directors, 187; by 
public officers, 187. 

Examination of paid checks, 95. 

Exchange, medium of, 4; how it is 
effected, 5; of checks, 16: process 
through Clearing-House, 65 et seq.; 
charge on collection of checks, 81; 
domestic, 104 et seq.; foreign, 228 
et seq. 

Exchange teller, 45, 95. 

Expenses, periodical statement of, 184. 



Export, drafts on shipments for, 108; 

of gold, 231. 
Exporters, their bills of exchange, 229. 
Extension of bank charters, 29. 

Failure of banks, proceedings for liqui- 
dation in case of, 200 et seq. 

Florence, first banks in, 262. 

Foreign banks, agents of, in the United 
States, 227. 

Foreign bills. of exchange, 152, 228 et 
seq. 

"Foreign" collections, how made, 79. 

Foreign Department of Boston Clearing- 
House, 83. 

Foreign exchange, 228 et seq. 

Foreign items, how collected, 61, 79. 

Foreign loans, how made, 237. 

Forgeries, paying teller must look out 
for, 88. 

France, first banking in, 271; present 
system in, 293. 

France, Bank of, 272, 293. 

Franchise of bank, forfeiture of, 201. 

Free banking law of New York, 314. 

Gallatin, Albert, recommends renewal 
of charter of United States Bank, 304. 

General balance of bank's accounts, 182. 

General clerk, duties of, 154. 

General ledger, how kept, 178; ac- 
counts in, 180. 

General proof, or teller's proof, 183. 

Genoa, first banks of, 262. 

Germany, early banking in, 273; 
present system, 288 et seq. 

Gold, as medium of exchange, 5; in 
American dollar, 24; how shipments 
of, are made, 231; in settlement of 
international balances, 233; move- 
ment controlled in London, 283. 

Government bonds, deposited in or- 
ganizing national bank, 27; to secure 
circulation, 32. 

Greece, banking in, 299. 

Hamburg, bank of, 264. 

Hamilton, Alexander, recommends 
United States Bank, 303; connection 
with first New York bank, 312. 

Holland, banking in, 275, 300. 

Hongkong and Shanghai Banking Com- 
pany, 227, 302. 

Identification, of person presenting 
check, 88; of savings-bank deposi- 
tors, 247. 

Illinois, early backing experience, 315. 

Imperial Bank, of Germanv, 273, 288; 
of Persia, 285; of Russia, 275, 301. 



INDEX 



345 



Imperial Ottoman Bank, 299. 

Importers, use of bills of exchange, 229. 

Importing point of gold, 231. 

Independent treasury system estab- 
lished, 308. 

Indiana, State Bank of, 317. 

Individual ledger, how kept, 173. 

Indorsed paper, meaning of, 12, 120. 

Indorsement, of note, 8; of checks 
deposited, 50; of checks for collec- 
tion, 77; of checks for payment, 88; 
of commercial paper, 119, 120. 

Information Bureau, 45, 100. 

Information clerk, duties of, 100. 

Interest, meaning of, 7; what deter- 
mines rates, 127. 

International banking, 228 et seq. 

International Banking Company, 227. 

International checks, or travelers' 
checks, 243. 

Investments of savings-banks, 245, 
253. 

Ionian Bank, 299. 

Ireland, banking in, 270, 286. 

Isle of Guernsey, Bank of, 287. 

Isle of Man Banking Compan;/ , 287. 

Italy, banking in, 261, 275, 297. 

Jackson, President Andrew, attack of, 

on United States Bank, 306. 
Japan, banks of, 302. 
Joint-stock banks of England, 267, 284. 

Kentucky, early banking in, 316. 
"Kiting'' checks, 96. 

Labor as measure of value, 3. 

Law, John, his banking scheme in 
France, 271. 

Lawful money, what constitutes, 32; 
used in redeeming bank-notes, 161. 

Ledgers, how divided, 170; balance, 
171; deposit, or individual, 173; 
foreign, 170, 177; bank, 177; gen- 
eral, 178; savings-banks, 251. 

Letter of advice for transfer of cash, 
110. 

Letter of credit, domestic, 112, 150; 
foreign, 240. 

Letter files, how kept, 156. 

Letters, received and sent out, how 
handled, 155. 

Letters of transmission and remit- 
tances in collecting, 79. 

Liabilities, in general ledger accounts, 
181; in report to Comptroller, 190; 
settlement in case of failure, 202. 

Liquidation of failed banks, 200 et 
seq. 

Lists, of checks received, 53; of ex- 



changes for Clearing-House, 62; of 
vouchers, 98. 

Loan certificates, of Clearing-House, 
208. 

Loan clerk, duties of, 137 et seq. 

Loans, main business of banks, 10; 
how made, 12; time, demand, and 
on call, 13; on collateral security, 
137 et seq.; foreign, 237; sterling, 
238. 

Locks, of bank vaults, 35; of safe-de- 
posit vaults, 256. 

Locofocos, in " antibank " movement, 
314. 

London, why "Clearing-House of the 
world's commerce," 235; foreign 
bank agencies in, 285. 

London and Westminster Bank, 267. 

Louisiana banking system, 318. 

McCulloch, Hugh, president State 
Bank of Indiana, 317. 

McLane, Louis, connection with United 
States Bank controversy, 306, 307. 

Madison, President James, connection 
with United States Bank, 305. 

Mail teller, duties of, 44, 62. 

Manager, of Clearing-House, 68; of 
syndicates, 225. 

Manhattan Company, charter of, 313. 

Market, first occasion for, 3. 

Mason, Jeremiah, connection with 
United States Bank controversy, 306. 

Massachusetts, no State banks in, 213; 
first banks in, 303, 310. 

Medium of exchange, what it means. 4. 

Messengers, duties of, 197. 

Michigan, early banking experience in, 
313. 

Mississippi, early banking in, 316. 

Money, its origin and meaning, 4; 
different meanings, 19; "lawful," 32. 

Money-lenders the first bankers, 9. 

Money-lending, origin of, 8. 

Money market, effect of domestic ex- 
change upon, 115; effect of Treasury 
operations, 116. 

Money-orders, bank, 149, 151. 

Mortgage loans of savings-banks, 245. 

Movement of money in domestic ex- 
change, 115. 

Napoleon founds the Bank of France, 
272. 

National Bank Act, provisions for or- 
ganizing banking associations, 26 
et seq. ; 326 et seq. ; provisions for 
liquidation of insolvent banks, 200, 

National Bank of Belgium, 276. 

National Bank of Greece, 299. 



346 



THE MODERN BANK 



National banking system of the United 
States, 325 et seq.; statistics of, 331. 
National Danish Bank, 276, 302. 
Netherlands, Bank of, 275, 300. 
New York (city) , deposits of country 
banks in, 78; as center of domestic 
exchange, 110; agencies of foreign 
banks in, 227; as center of foreign 
exchange for America, 231. 
New York (State) , early banking sys- 
tems, 312. 
New York Clearing-House, 63 et seq. ; 
volume of clearings, 72; history of, 
205; organization, 206; functions, 
207; loan certificates, 208. 
New York Exchange, meaning of, 109; 
use in general domestic exchange, 
114. 
Non-member banks, not belonging 
to Clearing-House association, privi 
leges allowed them, 63, 207. 
Norway, banking in, 276, 302. 
Notary public, his duty in making 

protests, 157. 
Note-broker, business of, 126, 134. 
Notes, of banks, what they are, 21; 
use of, 22; those of United States 
national banks, 27; restrictions 
upon, 116; redemption of, 160; 
provisions of law relating to, 328. 
Notes, promissory, what they are, 8; 
discount of, 118; purchase of, 118; 
purchase on option, 126, 134; pro- 
test of, when unpaid, 158. 
Note-teller, duties of, 43; details of 
his work, 60; his proof, 61; receipts 
from collections, 103; collects ma- 
tured notes, 124; his charge of sup- 
plementary credits and debits, 173; 
form of his daily proof, 173. 

" Offering-book " for discounts, 122. 
Offerings for discount, credit clerk's 

record of, 133. 
Officers, of commercial bank, 39; of 

savings-bank, 246. 
Ohio, State Bank of, 317. 
Organization of banks, 25 et seq. 
Over-drafts, 90, 97, 142. 

Paid checks, how disposed of, 93 et seq. 

Paper, commercial, 118 et seq. 

Paper money, origin and meaning, 19 
et seq. 

Par, of domestic exchange, 112; of 
sterling exchange, 230. 

Pass-book, of depositors, 48; entries in, 
51; how balanced, 98, 176; savings- 
bank, 247. 



Paying teller, duties of, 45; details of 
his work, 85 et seq.; cash schedule, 
89; proof, 91; statement of cash at 
end of day, 92; in savings-bank, 
250. 

Payment, of checks, 85 et seq.; of dis- 
counted notes, 124; of collateral loans 
144, 145. 

Portugal, Bank of, 299. 

Premises of bank, 34. 

Premium in domestic exchange, 112. 

President, of bank, 27; duties and 
responsibilities of, 39; approval of 
discounts, 120; signature of reports, 
192; of savings-bank, 246. 

Press-copying, 82, 156. 

Private banking-houses, nature of busi- 
ness, 223; act as brokers, 226; in- 
ternational banking by, 228 et seq. 

Profit and loss, account of, 180. 

Promotions in clerical force, 198. 

Proof, receiving teller's, 54; note- 
teller's, 61, 173; paying teller's, 91; 
general, 183; in savings-bank, 250. 

Proof clerk in Clearing-House, 66. 

Protest of unpaid checks, drafts, and 
notes, 77, 81, 157. 

Provincial Bank of Ireland, 270. 

Rack slip, used by receiving teller, 52. 

Rates, of domestic exchange, how de- 
termined, 112; of foreign exchange, 
232, 234; of discount, how affected, 
119; of discount, what determines, 
127; on call loans, how fixed, 139. 

Receiver of insolvent banks, 201. 

Receiving teller, duties of, 43; details of 
work, 47 et seq.; proof of, 54; of 
savings-bank, 248. 

Recipisse of Bank of Amsterdam, 263. 

Reclamations for errors in exchange 
of checks, 95. 

Redemption of bank-notes, 160, 202, 
328. 

Rediscount of notes, 125. 

Register, for collections, 101; for dis- 
counts, 122; for collateral loans, 
142; of cashier's checks, 147; of 
certificates of deposit, 148. 

Register of the Treasury, signature on 
bank-notes, 28. 

Reichsbank of Germany, 273, 288. 

Reports, of condition of bank, 190; 
of earnings and dividends, 193; of 
circulation, 194. 

Reserve, purpose of, 14; to secure pay- 
ment of bank-notes, 22; of national 
banks, 32, 163; of State banks, 32, 
166; how strengthened, 166; fortified 



INDEX 



347 



by Clearing- House, 208; legal require- 
ments, 327. 

Reserve agents, for country banks in 
reserve cities, 78. 

Reserve cities, 164, 327. 

Resources, in general ledger accounts, 
181; in report to Comptroller, 190. 

Restriction Act in England, 207. 

Roumania, banking in, 300. 

Royal Bank of Scotland, 269. 

Russia, banking in, 275, 301. 



Safe-deposit vaults, 255 et seq. 

Safety-fund system of New York, 313. 

Savings-lx aks under State supervision, 
195; description of, 244 et seq. 

Schedules 1 reports of condition, 192. 

Scotland, earliest banking in, 268; pres- 
ent system, 28o. 

Seal of national banks, 31. 

Secretary of savings-banks, 246, 253. 

Securities, use of, in obtaining loans, 13; 
collateral, 139; purpose of investing 
in, 167. 

Servia, banking in, 300. 

Settlement, of balance between banks, 
16; at Clearing-House, 69, 70. 

Settlement book, 169. 

Settlement sheet, for Clearing-House 
exchanges, 66. 

Settling clerk, in charge of Clearing- 
House exchanges, 66, 69. 

Shareholders of national banks, 26 et 
seq. ; action in case of failure, 202. 

Shipping point for gold, 232. 

Sight drafts, 104. 

Single-name paper, meaning of, 12; dis- 
count of, 120, 123. 

Societe Generate, of France, 295. 

South Carolina, State Bank of, 316. 

Spain, banking in, 277.' 

Stamp, on checks received, 56; for 
indorsements, 57. 

State Bank of Denmark, 276. 

State Bank of Sweden, 276, 301. 

State banks, organization of, 25; 
conversion to national, 28; regula- 
tion of, 32; reserve required, 32; 
examination of, 187; reports of con- 
dition, 195; proceedings in case of 
failure, 203; provisions relating to, 
213; old systems, 310 et seq. 

Statement book, use of, 183. 

Statements, of borrowers as evidence 
of credit, 131; of banks to Clearing- 
House, 188; of Clearing-House for all 
banks, 190. 

Statistics, tables for bank officers, 185. 

Sterling exchange, 230. 



Sterling loans, 238. 

Stock and bond clerk, 154. 

Stock, capital, of national banks, 27; 
certificates of, 29; transfer of, 30. 

Stock exchange, call loan to brokers, 
139; quotations of loan securities, 
144; advantage to banks, 146. 

Stockholders, meeting of, 30, 38. 

Stock ledger, 30. 

Stock register, 30. 

Stocks and bonds, bought and sold for 
bank customers, 154. 

Stop clerk, duty of, 96. 

Stringency in money market, caused by 
crop-moving, 115. 

Substitution, of securities for collateral 
loans, 144. 

Sub-Treasury, United States, use of 
Clearing-House facilities, 72; effect of 
operations on money market, 116; 
establishment of system, 308. 

Suffolk bank system, 311. 

Superintendent of Banking in New 
York, 187, 213. 

Supplementary credits, kept by note- 
teller, 61. 

Supplementary debits, kept by note- 
teller, 61. 

Surplus, required for national banks, 
31; of savings-banks, 245. 

Surplus reserves, 166. 

Sweden, banking in, 276, 301. 

Switzerland, banking in, 277. 

Syndicates, for underwriting and placing 
securities, 224. 

Taney, Roger B., orders removal of 
deposits from United States Bank, 
307. 

Tax on bank circulation, 162, 194. 

Tellers, general duties of, 43, 44; re- 
ceiving, 47; note, 60, 172; paying, 
85; mail, 44, 62; exchange, 45; rela- 
tive positions, 198. 

Teller's proof, or general proof, 183. 

Teller's settlement book, 91. 

Texas, no State banks in, 213. 

"Tickler," for record of coming collec- 
tions, 102; for bills discounted, 122. 

Time drafts, 144, 107. 

Time loans, meaning of, 13; on collat- 
eral security, 137, 139. 

Transfer, of shares of stock, 30; of 
currency in domestic exchange, 114. 

Traveler's checks, 243. 

Treasurer of savings-bank, 226, 253. 

Treasurer, United States, signature on 
bank-notes, 28; security deposited 
with, 31; part in redemption of 
bank-notes, 162. 



348 



THE MODERN BANK 



Trust companies, substitute for re- 
serves, 178; subject to State super- 
vision, 195; Clearing-House state- 
ments, 207; general functions and 
methods, 214 et seq. 

Trustees of savings-banks, 244, 246. 

Turkey, banking in, 299. 

Tyler, President John, vetoes United 
States Bank bill, 308. 



Underwriting, of securities by syndi- 
cates, 224. 

United States National banking sys- 
tem, 325 et seq. 

United States Bank, first, 303; sec- 
ond, 305 et seq. 

United States bonds deposited in or- 
ganizing national bank, 27; to se- 
cure circulation, 28. 

United States notes, legal tender, 23. 

United States Sub-Treasury, privilege 
at New York Clearing-House, 72; 
service in transferring currency, 114; 
effect of operations on money mar- 
ket, 116. 

United States Treasury, influence upon 
money market, 115; independent 
system established, 308. 



Value, how produced, 2; standard of, 
5; of circulation to bank, 162. 

Van Buren, Martin, recommends in- 
dependent treasury system, 308; 
recommends New York safety-fund 
system, 313. 

Vault, of bank, 36; of credit depart- 
ment, 130; of safe deposit company, 
255 et seq. 

Venice, first banks of, 262. 

Vice-president of bank, 27; duties of, 
40. 

Vienna, first bank, 274. 

Voucher-list of paid checks, 98. 

Vouchers, canceled checks as, 98. 

Vowel system of arranging names in 
ledgers, 170. 

Warehouse receipts, use of, 109; as 

security for loans, 138. 
Western Bank of Scotland, failure of, 

269. 
"Wild-cat" banks, 315. 
Wisconsin insurance company as bank, 

317. 
Woodbury, Levi, associated with attack 

on United States Bank, 306. 

Yokohama Specie Bank, 227. 



(1) 



THE END 






APPLETONS' BUSINESS SERIES, 
Funds and Their Uses. 

A Treatise on Instruments, Methods, and Institutions 
in Modern Finance. By Dr. F. A. Cleveland, of the 
Wharton School of Finance, University of Pennsylvania. 
Illustrated. i2mo. Cloth, $1.25 net; postage, 12 cents 
additional. 

Dr. Cleveland's purpose is to give a preliminary survey, to mark 
out the ground, and establish lines for future development. Look- 
ing upon the subject as one which has to do with the getting and 
spending of funds for private enterprise, the materials are grouped 
around three central ideas, viz., (1) What are Funds ? (2) How Funds 
are Obtained ; and (3) Institutions and Agents employed in Funding 
Operations. 

The chapters are replete with engravings of the financial instru- 
ments discussed. In obtaining illustrations of notes, drafts, docu- 
ments, bills, private and corporate bonds, trust agreements, and so forth, 
actual bills and securities on the market have been largely used. Over 
one hundred and fifty exhibits are employed to illustrate the text. 

"A financial library in itself." — New York Press. 

" Full of helpful information." — St. Paul Despatch. 

11 A work of great practical value, and one that should be in every library." — 
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"It is not only a highly instructive work, but it is also one of great interest." — 
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" It is one of the simplest and best treatises on modern business transactions that 
has ever been published." — Spokane Spokeman Review. 

"Investors will be able to use their bankers, brokers, or lawyers more intelli- 
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"Professor Cleveland has prepared a work that is not too technical for the ordi- 
nary reader to understand, and yet it is so comprehensive that every business man 
is likely to find it a most valuable possession." — Milwaukee Sentinel. 

u Dr. Cleveland is almost a pioneer in this class of literature, and the present 
volume will, for this reason, be found of the utmost value in a day when financial 
organization and the manipulation of finances has come to play so large a part in 
the business life of the nation." — Pittsburg Chronicle-Telegraph. 

"The ambitious clerk, who has to act for his employer under instructions which 
he does not always find perfectly intelligible, and which of necessity leaves more or 
less to his discretion, will find Professor Cleveland's book the basis of a liberal busi- 
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going on in the world of business and finance by following the daily reports, he will 
quickly gain a knowledge which will have a money value, and which cannot fail to 
attract the attention of his principals." — New York Times Saturday Review. 

D. APPLETON AND COMPANY, NEW YORK. 



AN IMPORTANT FINANCIAL WORK. 

Clearing Houses. 

Their History 3 Methods, and Administration. By 
James G. Cannon, Vice-President of the Fourth 
National Bank of the City of New York. Illus- 
trated. Crown 8vo. Cloth, $2.50. 

This is the first book to give, in a single volume, a history of 
the Clearing Houses of the United States and a description of their 
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students of financial subjects. Descriptions of some of the chief 
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the subject in a single volume. 

"The past and present, with some reflections of the possible future of 
the clearing house, is the subject of thoughtful and comprehensive treatment by 
Mr. Cannon, who has brought the experience of a lifetime spent in the banking 
business to aid him in his study of this important adjunct to modern financial 
operations. . . . The literature of the subject has been of a fugitive character, 
and in bringing all the various matters connected with the clearing house into 
one volume Mr. Cannon has made a contribution to the general literature of 
banking. ' ' — Bradstreet' s. 

" Up to the present time there has been no such work published, and if 
any one wished to inform himself in the matter of clearing houses he had first 
to collect his materials from various and scattered sources. It is, of course, 
impossible to do justice to Mr. Cannon's admirable book in the space at our 
command. It is a complete and remarkably readable exposition of the functions 
and history of the clearing houses of the United States, Canada, and London. 
All the details of clearing-house management are fully set forth, and especially 
of timely interest is Mr. Cannon's exposition of the various rules now in opera- 
tion for the collection of interior checks." — American Banker. 

"The volume is one to which to turn not only for a complete and accu- 
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Journal of Commerce. 

D. APPLETON AND COMPANY, NEW YORK. 



A VALUABLE FINANCIAL BOOK. 
Financial Crises. 

And Periods of Industrial and Commercial Depression. 
With Diagrams, Bibliography, and Index. By Theodore 
E. Burton, i 21110. Cloth, $1.40 net ; postage, 12 cents 
additional. 

This valuable work combines theory, criticism, and statistical 
fact. In the theoretical part the author exposes some fallacies as 
to financial crises and panics, and offers a positive theory which 
is reasonable and tenable. His analysis of partial gluts and of 
misdirected production as a chief element in producing crises and 
depressions is an important feature. It is believed that there is no 
book in English which would make a satisfactory substitute for 
this work. One notable point is the close association of rapid 
industrial progress with panics. Where industrial development 
is greatest, there is the largest likelihood of crises, according to the 
author, but he notes the great advance in recent years in the adop- 
tion of preventives of crises. Attention is called to the greater 
prominence in recent years of periods of depression and also peri- 
ods of prosperity, and the decreased prominence of sharp and 
severe crises or panics. Another point of importance is the subject 
of export and import statistics, their varying relation and their sig- 
nificance as an index to prosperity. In a chapter on the indica- 
tions of the approach of a crises or depressions, extended reference 
is made to the course of prices of iron and steel, and also to fluc- 
tuations in the stock market. The author's connection with large 
business interests, his long experience as a lawyer, and his service 
in Congress, where he has been conspicuously identified with 
important committees, have afforded a wide and valuable equip- 
ment. His work might be said to be a practical handbook on the 
pathology of the body financial. The interest attaching to the 
theme is emphasized occasionally by occurences like the Blue 
Thursday of last May. For bankers and others in financial and 
business life, and for general readers of financial books and 
advanced students, Mr. Burton's work will have especial value. 

D. APPLETON AND COMPANY, NEW YORK. 



APPLETONS' BUSINESS SERIES. 

Trust Finance. 

By Dr. E. S. Meade, of the Wharton School of Finance, 
University of Pennsylvania. i2mo. Cloth, $1.25 net; 
postage, 12 cents additional. 

In " Trust Finance " are discussed the methods which have been 
employed and the financial principles which are illustrated in the pro- 
motion, financing, and financial management of the industrial trusts. 

The author has no program of trust regulation to advocate, nor is 
it apparent that he considers any scheme of regulation necessary or 
even desirable. He confines himself to a discussion of financial meth- 
ods and principles as illustrated by the history of the Industrial Trust, 
and avoids the main grounds of the controversy which the so-called 
11 Trust Question " arouses. The book will be of service to the in- 
vestor, and to the student of finance who wishes to gain an insight into 
the nature of the trust as an institution without reference to its moral 
or ethical characteristics and functions. 

11 A useful and timely work." — Chicago Inter-Ocean. 

"Of profitable interest to students of finance." — Boston Advertiser. 

"A masterly study of trusts from the investor's standpoint." — The 
Outlook. 

" Nothing more searching and brilliant has been written on the 
subject." — Seattle Times. 

"Interesting because it gives a complete resume of the whole 
* trust' subject." — Philadelphia Inquirer. 

" Nothing could be more enlightening and fairer than Professor 
Meade's discussion of the conditions that drove competitive industries 
into combination." — Chicago Evening Post. 

" A comprehensive and able statement of the genesis, the organiza- 
tion, and the management of the industrial combinations commonly 
known as the 'trusts.' This field has been made the subject of any 
number of newspaper and magazine articles, as well as addresses 
before economic associations, but which is for the first time dealt with 
in the large and thorough way which Mr. Meade is able to employ in 
this book. He has made a valuable addition to financial literature." — 
Wall Street Journal. 

D. APPLETON AND COMPANY, NEW YORK. 



A PRACTICAL BOOK BY A PRACTICAL MAN. 



The Work of Wall Street. 

By Sereno S. Pratt. i2mo. Cloth, $1.25 net; 
postage, 12 cents additional. 

11 In ' The Work of Wall Street ' Sereno S. Pratt has not contented 
himself with the authorship of the best book published on the mech- 
anism, personality, function, operations, and ramifications of the finan- 
cial Isis and Osiris of the western world, but has written it in a style 
which for clearness and interest is fascinating. He has drawn the veil 
from what to so many has been a mystery, so that one may easily see 
the wheels revolve, almost hear them click. . . . Those whose libraries 
or tastes include the works of such writers as Bryce, Jevons, Sumner, 
and White will surely discover a niche beside them for ' The Work of 
Wall Street.' " — Albert C. Stevens (former Editor Bradstreet 's) in 
Newark Evening News. 

" A book that can not be too highly recommended to those who 
desire to know what Wall Street is and how it does its work." — Wall 
Street Journal. 

" It is one of the best books on Wall Street that has ever been 
published." — Brooklyn Eagle. 

11 A well-written and generally thorough digest of the operations 
of the financial district." — New York Sun. 

" It has no equal." — New York Press. 

" The most fascinating presentation possible of a subject of the 
utmost interest to business men and students of economics." — Chicago 
Record-Herald. 

"Clear, simple, direct, straightforward, impartial, and, above all, 
informing. . . . Mr. Pratt has done a real service in describing the 
things which the stock exchange accomplishes, and its usefulness to 
the nation at large." — Boston Herald. 

11 The author knows the ins and outs of the New York stock market, 
and the book is veritably a mine of knowledge about matters very 
little understood by the public. . . . Particularly valuable are Mr. 
Pratt's explanations of the jargons of the street — of words and phrases 
which to most persons not actively engaged in the stock business are 
quite unintelligible." — Philadelphia Ledge?. 

D. APPLETON AND COMPANY, NEW YORK. 



APPLETONS' BUSINESS SERIES. 

American Railway Transportation. 

By Emory R. Johnson, of the University of Penn- 
sylvania. Illustrated, nmo. Cloth, $1.50 net; postage, 
12 cents additional. 

A volume on this subject belongs of necessity in the Business Series. 
It is a vast and intricate subject, and is intimately associated with the 
daily lives of practically every adult person. Professor Johnson has 
been known for some years as one of our best authorities upon the 
subject. It has been a source of special study to him, and the instruc- 
tion he has given upon it has been recognized as of a kind surpassed 
probably by no other teacher. He has prepared his book with an alert 
sense of what the general public needs by way of knowledge. It is 
admirably arranged, and, while intended to afford instruction, it is also 
entertaining. 

" The work is undeniably an authority on the subject and should find a 
place in the library of every student of business conditions of this era. The 
subject is treated in a masterly manner by one who has made a complete and 
exhaustive examination, not only of the present conditions, but of the germi- 
nation and fostering of the great transportation economics of this country." 

— New York Commercial. 

"The subject has been covered in a thoroughly complete manner, both 
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has made his name well known as an authority on his chosen subject, and it is 
doubtful if the publishers could have chosen anyone who could have given 
such adequate treatment. In point of arrangement the book is admirable, 
and the result achieved is such that the work will not only impart a great deal 
of information, but will interest as well. The unprecedented activity in trans- 
portation circles at present would seem to make the publication of the book 
one of the very timely enterprises of the watchful publishers. " 

— St. Louis Globe-Democrat . 

"It is a careful and conscientious piece of work that presents a mass of 
complex and important information in a clear form." — New York Sun. 

D. APPLETON AND COMPANY, NEW YORK. 






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